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Home > Balance Sheets Calculations > Creating a Balance Sheet

Balance Sheets Calculations

Creating a Balance Sheet

What It Measures

The financial standing, or even the net worth or owners’ equity, of a company at a given point in time, typically at the end of a calendar or fiscal year.

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Why It Is Important

The balance sheet shows what is owned (assets), what is owed (liabilities), and what is left (owners’ equity). It provides a concise snapshot of a company’s financial position.

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How It Works in Practice

However they are presented, assets must be in balance with liabilities and stockholders’ equity. In other words, assets must equal liabilities plus owners’ equity.

Assets include cash in hand and cash anticipated (receivables), inventory of supplies and materials, properties, facilities, equipment, and whatever else the company uses to conduct its business. Assets also need to reflect depreciation in the value of equipment, such as machinery, that has a limited expected useful life.

Liabilities include pending payments to suppliers and creditors, outstanding current and long-term debts, taxes, interest payments, and other unpaid expenses that the company has incurred.

Subtracting the value of aggregate liabilities from the value of aggregate assets reveals the value of owners’ equity. Ideally, this should be positive. Owners’ equity consists of capital invested by owners over the years and profits (net income) or internally generated capital, which is referred to as “retained earnings;” these are funds to be used in future operations. An example is given below.

Assets $
Cash 8,200
Securities 5,000
Receivables 4,500
Inventory and supplies 6,300
Land 10,000
Structures 90,000
Equipment (less depreciation) 5,000
... ...
Total assets 129,000

Liabilities $
Payables 7,000
Taxes 4,000
Miscellaneous 3,000
Bonds and notes 25,000
Total liabilities 39,000
Stockholders’ equity (stock, par value × shares outstanding) 80,000
Retained earnings 10,000
Total liabilities and stockholders’ equity 129,000

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Tricks of the Trade

  • The balance sheet does not show a company’s market worth, nor important intangibles such as the knowledge and talents of individual people, nor other vital business factors such as customers or market share.

  • The balance sheet does not express the true value of some fixed assets. A six-year-old manufacturing plant, for example, is listed at its original cost, even though the price of replacing it could be much higher or substantially lower (because of new technology that might be less expensive or vastly more efficient).

  • The balance sheet is not an indicator of past or future performance or trends that affect performance. It needs to be studied along with two other key reports: the income tax return and the cash flow statement. A published balance sheet needs to include prior period comparatives.

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Further reading on Creating a Balance Sheet


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