How to prepare a balance sheet

  1. Find and record total assets.
    1. List the current assets and draw a single line under the last entry.
    2. Total the current assets and draw a single line under the total.
    3. List the fixed assets and draw a single line under the last entry.
    4. Total the fixed assets and draw a single line under the total.
    5. Total current and fixed assets, and draw a double line below the grand total.
  2. Find and record total liability.
    1. List the current liabilities and draw a single line under the last entry.
    2. Total the current liabilities and draw a single line under the total.
    3. List the long-term liabilities and draw a single line under the last entry.
    4. Total the long-term liabilities and draw a single line under the total.
    5. Total current and long-term liabilities, and draw a single line below the grand total.
    6. Find and record the total owner's equity.
      1. Make a list of owners' equities, one per line, with a single line after the list.
      2. Total the equities and draw a single line below the total.
    7. Sum current and long-term liabilities with owner's equity, and draw a double line underneath the total.
  3. Confirm the balance.
    1. Total Assets should be equal to Total Liabilities, which include owner's equity.

Let's take a closer look at the how and why of this process. As you know, a balance sheet is used to determine the status of a company and is an important step towards determining its health. It's called this because a balance sheet was historically written in two columns, with assets on the left and liabilities on the right. If the two sides didn't "balance", something was wrong. Prior to the invention of the joint stock company (currently known as the corporation) this was reasonable because owner's equity was generally limited to a small number of partners, and also because only the largest firms had long lists of assets.

Owner's Equity refers to the interest in the company by the owner or owners. In the case of a simple business, there may be only one owner. Corporations have many owners, because every stockholder is an owner. Of course they do not all need to be considered on a balance sheet; Simply enumerating the outstanding shares of different types and their value is sufficient. It is a liability because it can be considered money owed to the owners by the company, even in the case of a business owned by a single individual.