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    Saturday
    Dec242011

    How to prepare a balance sheet

    The balance sheet shows the financial position of a business as of a specific point in time. To prepare a balance sheet, follow these steps:

    1. Print the trial balance. The trial balance is a standard report in any accounting software package. If you are operating a manual system, then construct the trial balance by transferring the ending balance in every general ledger account to a spreadsheet.
    2. Adjust the trial balance. It is usually necessary to adjust the preliminary trial balance to ensure that the balance sheet is in compliance with the relevant accounting framework (such as GAAP or IFRS). We use adjusting entries to modify the trial balance.
    3. Eliminate all revenue and expense accounts. The trial balance is comprised of accounts for revenue, expenses, gains, losses, assets, liabilities, and equity. Eliminate from the trial balance all accounts except those for assets, liabilities, and equity. Incidentally, the eliminated accounts are used to construct the income statement.
    4. Aggregate the remaining accounts. The line items in the balance sheet are usually far fewer than the line items in the trial balance, so aggregate the trial balance line items into the ones used in the balance sheet. For example, there may be multiple cash accounts in the trial balance that should be aggregated into a single "cash" balance sheet line item. The typical line items used in the balance sheet are:
      • Cash
      • Accounts receivable
      • Inventory
      • Fixed assets
      • Other assets
      • Accounts payable
      • Accrued liabilities
      • Debt
      • Other liabilities
      • Common stock
      • Retained earnings
    5. Cross-check the balance sheet. Verify that the total for all assets shown in the balance sheet equals the total for all liability and stockholders' equity accounts.
    6. Present in desired balance sheet format. Re-write the resulting balance sheet into the format required for presentation. For example, it may be in comparative format, where the financial position of the business as of multiple dates are listed side-by-side in the report.

    Related Topics

    Balance sheet overview 
    Classified balance sheet 
    Common size balance sheet 
    Comparative balance sheet 
    What is a vertical balance sheet? 

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