The business balance sheet is one of the most important financial documents that can help you secure a startup loan. Preparing it may seem unnecessary since you have an existing business, but it is still important to outline your estimates in writing. The balance sheet checks that, and it can guide you and potential lenders when applying for a startup loan.
What is a small business balance sheet?
A balance sheet is a business document that shows what the company owns, what it owes, and the owner’s equity in the business. It is calculated at specific points in time, such as at the startup stage and then at the end of each month, quarterly, annually, and at the end of operations.
What are the components of a balance sheet?
The balance sheet is organized into two sections. The left side typically displays all of the company’s assets. The second section on the right shows the company’s liabilities and the owner’s equity for small businesses or retained earnings for corporations.
Accounting equation
The total assets of the company must equal the total liabilities and total owner’s equity. The totals must balance. The accounting formula is the basis for planning the balance sheet: assets = liabilities + owner’s equity. This is referred to as the accounting equation.
Balance sheet vs. income statement
The income statement, also known as the profit and loss statement, shows the sales activity and profits of the business over time. What is the income and what are the expenses over a specific period?
The balance sheet is a financial snapshot of the business at a specific point in time, such as the end of a quarter or year.
Note: The financial condition of the business changes constantly, so both statements are necessary to provide a complete picture of the business’s financial situation.
Why does a business need a balance sheet?
The balance sheet is an important document that provides information to potential lenders who will be looking for specific information about the business to consider for a startup loan. It is also important for you as the business owner because it gives you a snapshot of the business at different points in time.
The balance sheet shows the business’s financial position as of the startup date for a new business that has no prior history. This includes what has actually happened in the current stage of the startup and what will happen before the startup date.
Steps to prepare a business balance sheet
All calculations in this sheet are based on the startup date.
Asset value
First, record the value of all assets in the business as of the startup date. This includes cash, equipment, vehicles, supplies, inventory, prepaid items such as insurance, and the value of any buildings or land owned.
Accounts receivable are typically included as assets, but there should not be any amounts due to the business since it has not started yet.
Liabilities and amounts owed
Record all business liabilities: amounts that the business owes to others. These will include business credit cards, any loans for the business at the startup phase, and any amounts owed to vendors at the startup phase. Add up the total liabilities of the business.
Assets vs. liabilities
The difference between assets and liabilities is presented on the balance sheet as “owner’s equity” for sole proprietorships or “retained earnings” for corporations. This amount is your investment in the business.
Example of a balance sheet: before and after the loan
One way to present the balance sheet to a lender is to create two copies: one to show the financial position of your new business before the loan you are requesting, and one to show your position after the loan.
The first financial sheet shows that the owner has already invested $13,500 in the business in the form of cash, prepaid insurance, and furniture and fixtures.
Simple balance sheet for startup business: before the loan
Assets: value
- Cash: $3,000
- Inventory: $0
- Prepaid insurance: $2,500
- Furniture and fixtures: $8,000
- Total assets: $13,500
Liabilities and owner’s equity:
- Current liabilities: $1,000
- Loans
- Long-term liabilities: $0
- Owner’s equity: $12,500
- Total liabilities and owner’s equity: $13,500
Simple balance sheet for starting the business: after the loan
The second sheet shows a loan of $50,000, used to purchase inventory of products for sale and to add more furniture and fixtures.
Assets: value
- Cash: $3,000
- Inventory: $40,000
- Prepaid insurance: $2,500
- Furniture and fixtures: $18,000
- Total assets: $63,500
Liabilities and owner’s equity:
- Current liabilities: $1,000
- Long-term loans and liabilities: $50,000
- Owner’s equity: $12,500
- Total liabilities and owner’s equity: $63,500
A review of the balance sheet shows that the owner has contributed $13,500 as owner’s equity to start the business, mainly in cash and furniture and fixtures.
Assets offset liabilities and owner’s equity. The current short-term liabilities of $1,000 might be minor debts owed to suppliers for some office furniture. Long-term liabilities and loans may be more likely tied to inventory and structures.
Frequently Asked Questions
What types of inventory does a manufacturing business report on the balance sheet?
Manufacturing businesses typically report four types of inventory on the balance sheet: raw materials, work in progress, finished goods, and scrap inventory.
Where do startup costs go on the balance sheet?
These costs typically appear either as capital or retained earnings in the owner’s equity section of your balance sheet, depending on whether you are operating as a sole proprietorship or a corporation.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and high-quality.
Small Business Administration. “5 Things to Know About Your Balance Sheet.”
Harvard Business School. “How to Read and Understand the Income Statement.”
Profitable Venture Ltd. “4 Types of Inventory a Manufacturing Business Reports on the Balance Sheet.”
Source: https://www.thebalancemoney.com/how-do-i-prepare-a-balance-sheet-for-business-startup-397545
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