ESSENTIALS OF

ACCOUNTING
Lecture 9. How to prepare Balance sheet
dr Jarosław Ziętarski
 The preparation of financial
statements
The financial statement are prepared from the transactions
that have been recorded.

Balance sheet Income statement

(statement of financial position)
Shows the recources that a
business has and how it has used
those resources
(statement of financial performance) shows
how much has been earned, which in
accounting is referred to as revenue, or
income, and how much it cost to earn this
income. The costs are referred to as expenses.
 How to prepare Balance sheet

Step 1a Prepare a header

Create a header for the report that includes the name of the
company and identifies it as a Balance sheet.
My example:

MY COMPANY, Inc.
Balance sheet
Step 1b How to prepare Balance sheet
Choose a time period for your Balance sheet
The first step in preparing a balance sheet is to choose the
reporting period your report will cover. Businesses typically
choose to report their P&L on an annual, quarterly, or
monthly basis.
MY COMPANY, Inc.
Balance sheet
December 31
2021 2022

Prepare a report for the last two years of your company

Use the basic accounting
equation to separate each
M B E R
section R E M E

Assets = Liabilities + Owner’s Equity

Owner’s Equity = Assets – Liabilities
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Goods and resources Debts of the company
owned by the company
OWNER’S EQUITY
Contribution of Owners
and past earnings
TOTAL ASSETS = TOTAL LIABILITIES AND OWNER’S
EQUITY
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES

OWNER’S
LAST DAY OF THE FISCAL YEAR EQUITY

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S

EQUITY
Step 2 How to prepare a Balance Sheet
List your assets by their liquidity—the facility by which
they can be turned into cash—starting with cash itself and
moving into long-term investments at the end of the list.
ASSETS:

LIQUIDITY
I. CURRENT ASSETS

II. NON-CURRENT ASSETS

 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Assets
Non-Current Assets OWNER’S EQUITY

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S

EQUITY
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Assets
Non-Current Assets OWNER’S EQUITY

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S

EQUITY
Current Assets may include:
Cash: All money in checking or savings accounts

Securities: Investments, stocks, bonds, etc.

Accounts Receivable: Money owed to the business by a client or customer

Inventory: Any products or materials that have already been created or

acquired for the purpose of sale

Pre-paid Insurance: Any payments made in advance for business insurance

coverage or services (this tends to be paid in advance for the year)
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Assets:
Cash
Marketable securities OWNER’S EQUITY
Account Receivable
Supplies
Inventory
Prepaid expenses
Total Current Assets
Non-Current Assets

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S EQUITY

Non-Current Assets may include:
Supplies: Important objects used for business operations
(manufacturing equipment, computers, office furniture, company
cars, etc.)

Property: Any office building or land owned by the business

Intangible Assets: Intellectual property such as patents, copyrights,

trademarks and other company rights that retain
intrinsic value
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Assets:
Cash
Marketable securities OWNER’S EQUITY
Account Receivable
Supplies
Inventory
Prepaid expenses
Total Current Assets
Non-Current Assets:
Property
Plant
Equipment
Total Non-Current Assets

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S EQUITY

 M B E R
R E M E

Don’t forget about

amortization and
depreciation
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Assets
Cash
Marketable securities
Account Receivable OWNER’S EQUITY
Supplies
Inventory
Prepaid expenses
Total Current Assets
Non-Current Assets
Property
Plant
Equipment
Patents
Copyrights
Trademarks
Other rights
Total Non-Current Assets

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S EQUITY

Step 3 Determine Liabilities

Liabilities are the negative part of the equation; these

include operational costs, debt and material expenses.
Generally speaking, the lower your liabilities, the greater the
value of your company (and equity) can be.
“Current Liabilities” include cash spent, as
well as any debts that must be paid out within
one year, while “Long-term Liabilities” refer
to bills due anytime after one year.
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Liability
Long-term Liability
OWNER’S EQUITY

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S

EQUITY
Current Liabilities may include:
Accounts Payable: Money owed by a business to its suppliers or partners

Business Credit Cards: Company credit card bills due

Operating Line of Credit: Any money owed to a bank that has extended the business an
operating line of credit

Taxes Owed: Any federal and state taxes owed for one year

Wages and Payroll: Employee compensation, including wages, medical insurance, etc.

Unearned Revenue: Any revenue garnered from a service or product that has yet to be
delivered to the customer or client
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Liability:
Accounts payable
Short term notes payable
Accrued liabilities
Total current liabilities
Long-term Liability
OWNER’S EQUITY
TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S EQUITY
Long-term (Fixed) liabilities may include:
Long-Term Mortgages: Property or building mortgage expenses

Bonds payable: Long-term bonds owed to the government, as well as any

interest paid on the bond (this interest is often semi-annual and can be added
to “Current Liabilities”)

Pension Benefit Obligations: The total amount of money the company owes to
employee pension plans up to the current date

Shareholder’s Loan: A form of financing provided by shareholders

Car Loan: Any long-term car loans on company vehicles (plus insurances costs)
 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES
Current Liability:
Accounts payable
Short term notes payable
Accrued liabilities
Total current liabilities
Long-term Liability:
Long-term notes and mortgages
Bond payable
Pension plan obligations
Total Long-term liabilities
Total liabilities

OWNER’S EQUITY
TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S EQUITY
Step 4 Equity Valuation
In a sole proprietorship, this is called the “Owner’s
Equity”; in a corporation, this is called “Stockholder’s
Equity,” and it can include common stock, preferred
stock, paid-in capital, retained earnings, etc.

Owner’s Equity = Assets – Liabilities

 MY COMPANY, Inc.
Balance sheet
December 31

ASSETS LIABILITIES

OWNER’S EQUITY

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S

EQUITY
Equity may include:
Opening Balance Equity: The initial investment into the company

Capital Stock: The common and preferred stock a company issues

Dividends Paid: Profits paid out to shareholders by a company (applies to

corporations)

Owner’s Draw: Portion of the revenue used by company’s owner (applies to sole
proprietorships)

Retained Earnings: The sum of a company’s consecutive earnings since it began

 MY COMPANY, Inc.
Balance sheet
December 31
ASSETS LIABILITIES

OWNER’S EQUITY
Contributed Capital
Retained earnings

TOTAL ASSETS TOTAL LIABILITIES AND OWNER’S

EQUITY
 M B E R
R E M E

Don’t forget to transfer the balance of

net income (EAT) from the income
statement to retained earnings in
balance sheet
 M B E R
R E M E

Don’t forget to transfer the balance of

net income (EAT) from the income
statement to retained earnings in
balance sheet
 M B E R
R E M E

Don't forget to enter the units (e.g. in

thousands of dollars looks like this:
'000) and the currency, e.g. $
Don't forget the test after the lecture