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Financial reporting has evolved over the years, but the primary three financial statements have remained unchanged since the Great Depression, when accounting processes like the month-end close went from ad hoc, sporadic procedures to something performed on a regular basis. These three statements include the Balance Sheet, Income Statement, and Cash Flow Statement. The core responsibility of the financial statements is to provide business owners, stockholders, and investors the information they need to assess the financial health of the business.
Of these three, the Balance Sheet focuses on explaining the company’s value (net worth) at a specific point in time. The simple formula for calculating the net worth is:
Total Assets (what the company owns) – Total Liabilities (what the company owes)
This article will focus on the Balance Sheet and using a balance sheet template to create one.
What Is a Balance Sheet Template?
A balance sheet template is a tool that helps you create a balance sheet from the balances in your accounts. These templates are especially helpful for a small business that may have simple financials and only occasionally need a balance sheet created.
The templates have been created in both Microsoft Excel and Google Sheets. The sample balance sheet templates make it fast and easy to enter the account balances in the worksheet and present a professional-looking balance sheet.
How Is a Balance Sheet Calculated?
Because a balance sheet focuses on the financial position at a specific point in time, the ending account balances are used to calculate the amounts on a balance sheet. A balance sheet example can be found here.
The balance sheet has three main sections: Assets, liabilities, and equity.
Assets
The company’s assets section is a compilation of everything the company owns of economic value. The subsections (and a description of what they represent) consist of:
Current Assets – The current assets of a company are usually a combination of cash, accounts receivable, inventory, and prepaid expenses which are expected to be sold, used, or exhausted through standard business operations with one year. The assets that belong in this category are very liquid and if they are not cash, can quickly be converted to cash if needed.
Investments – The investments of a company are cash that is in an investment account or other investments such as certificates of deposits (CD’s).
Fixed Assets – The fixed assets are the long-term assets of the company and are usually land, land improvements, buildings, and equipment. The fixed assets are reduced by accumulated depreciation.
Intangible Assets – The intangible assets of a company can be either long-term or short-term. They typically include items such as goodwill and intellectual property. They differ from tangible assets because they are not physical assets (i.e. land or equipment).
Liabilities
The company’s liability section is a compilation of what the company owes. The subsections (and a description of what they represent) consist of:
Current Liabilities – The current liabilities of a company are the obligations which are short term (due in less than one year) in nature. Credit cards, accounts payable, lines of credit, and payroll liabilities are most often found in this section of the balance sheet.
Long – Term Liabilities – The long-term liabilities represent the long-term debt that is due in more than one year. Notes and bonds payable are common types of long-term liabilities.
Equity
The final section of the balance sheet is the Equity section. Depending on the entity type, this section will be labeled either Owner’s Equity (sole proprietor) or Shareholder’s Equity (corporation). The equity section can get quite complex, but at the simplest level, this section will have retained earnings which represents the profits retained in the company from prior years. These profits are usually reinvested back into the company and used for working capital.
What Does a Balance Sheet Template Have to Do With Financial Ratios?
Lots! Many of the financial ratios that are critical for evaluating the health of a company are calculated from the sections found on the balance sheet. The benefit of using a balance sheet template is that it is easy to add the financial ratio calculations right in the Excel file. A few common financial ratios (and the calculations) derived from the balance sheet include:
Working Capital – The working capital ratio is calculated by subtracting the company’s current liabilities from its current assets. Working capital is a representation of its liquidity or as described by Investopedia, “...how easily that company can turn assets into cash to pay short-term obligations.” The working capital ratio is calculated by dividing current assets by current liabilities.
Quick Ratio – The quick ratio only applies if the company has inventory, but subtracts inventory from current assets and divides that into total liabilities.
Debt to Equity – Many banks look closely at the debt to equity ratio. This ratio is calculated by dividing total debt by equity.
Although this article is focused on the balance sheet and related financial ratios, there are many more financial ratios that are common and according to Inc.com, they can be broken down into the following four main categories: Profitability and return on investment, liquidity, leverage, and efficiency ratios.
Does Excel Have a Balance Sheet Template?
Although many folks have used Excel to create free balance sheet templates for download, Microsoft Excel also has several balance sheet templates in the software itself that can be used. The Excel template options can be found by opening Excel, clicking on File and New. It’s as easy as typing Balance Sheet in the search box and the options will come up.
In summary, using a balance sheet template provides a simple way to produce a balance sheet for those both inside and outside of the company needing more insight into the company’s resources. As a disclaimer: Be sure to correctly vet the free balance sheet templates before selecting one!