How to do a balance sheet: Complete guide with examples

The revenue looks strong. Customer growth is steady, churn is low, and margins look healthy. All signs point to this being the right time to invest, partner, or even buy. But the real story isn’t in the income statement. You’ll find it in the balance sheet. That’s where you’ll see the runway: solid current assets, manageable liabilities, and a healthy equity position. It’s a financial foundation that says a business isn’t just growing. It’s stable, prepared for the future, and worth betting on. 

In this guide, we’ll show you how to spot that kind of signal. We’ll walk through what a balance sheet includes, how to build one, how to analyze it, and how to leverage it to make smart choices when it comes to evaluating other businesses or steering your own.

Definition: What is a balance sheet?

A balance sheet is a financial report that shows what a business owns, what a business owes, and what’s left for the owners or shareholders—assets, liabilities, and equity—all in one place. It reflects your company’s financial position at a particular point in time, generally the end of the quarter of the fiscal year. Basically, it’s a centralized summary of your available resources and how they stack up against your obligations today.

Unlike the income statement and cash flow statement, the balance sheet doesn’t track performance over time. Actually, it does the opposite. A balance sheet tells you where things stand right now, which can help your leadership team chart the right course for your company’s current financial situation. Your last three years’ performance might suggest you’re ready to expand, but if the balance sheet says your current ratio is sliding, you might not have funds to sustain that step.

What is included in a balance sheet?

Every line on the balance sheet answers one of three questions: 

• What resources does the business have at its disposal? 

• What claims are others making on those resources?

•  What belongs to the business owners? 

Assets, liabilities, and equity aren’t just accounting categories; they represent how you finance your business operations. Here’s how each section works in practice.

Assets

Assets are the economic resources your business uses to fund its operations and to grow. There are two main types:

• Current assets: Short-term items, including items that you expect won’t last for more than a year, like cash, accounts receivable, inventory, and prepaid expenses 

• Non-current assets: Longer-term items,  like machinery and buildings (fixed assets), and patents or software rights (intangible assets) that you hold for an extended period

Liabilities

Liabilities are the other side of the scale: your business’s financial obligations and amounts it owes to others. 

• Current liability: An obligation due within a year. Accounts payable, accrued wages, and short-term loans fall into this category.

• Long-term liabilities: Obligations like bonds payable, leases, and other debt that extend more than one year into the future. 

Equity

Equity represents the owners’ or shareholders’ residual interest in your business once you’ve covered any liabilities. It typically fluctuates as the business earns profits, distributes dividends, or raises funds, and can include retained earnings, capital contributions, or stock.

Why is balance sheet analysis important?

Balance sheet analysis is important because it’s how you translate isolated data points into real-world assessments of risk and resilience. Can you afford to take a hit in a rough quarter? Can you grow without tipping over? Can you borrow to fund a project, or will any new debt sink you? You can think of it as a pressure test for your business’s financial health.

When you analyze the relationship between assets, liabilities, and equity, you’re actually looking for signs of balance (or imbalance). A solid current ratio in the assets section gives you peace of mind that you can afford new obligations, while a high debt-to-equity ratio might be a warning sign that you’re overleveraged. The ratios themselves don’t always give you answers, but they can point you to the right questions and help you make decisions before an outside force, like a board or a bank, forces your hand.

How do I create a balance sheet? Step-by-step 

Creating a balance sheet isn’t necessarily a complex exercise, but it’s always a precise one. Every number connects to another, so mistakes at the outset have a knock-on effect that grows the further down the sheet you travel. 

Not sure how to make a balance sheet? The steps below can help you go from raw figures to actionable insights.

Step 1. Gather financial data

First, collect all your relevant financial records for the reporting period. Start with the basics like your general ledger, bank statements, loan documents, but also think about more complex documents like schedules for depreciation, inventory, or accrued expenses. You’ll also need a recent income statement to cross-check specific figures. 

All of these documents should be the most current version possible if you want a useful balance sheet. That’s why you typically begin gathering information  near the end of the accounting cycle, after journal entries, ledgers, and trial balances are finalized.

Example: Alex, a Financial Analyst at Midsize Inc., has responsibility for preparing the company balance sheet. They start by pulling the company’s most recent general ledger, current bank statements, and payroll accrual reports for Q4. For good measure, Alex also grabs the latest income statement to verify year-end revenue. 

Step 2. List assets

Next, separate your assets into current assets and non-current assets. 

Cash, accounts receivable, and inventory are all “short term” insofar as they’ll be used, sold, or converted to cash within a year. That’s why they’re classified as current.  

Fixed assets like real estate and intangible assets like intellectual property qualify as “long term” or non-current assets because your business holds on to them longer. 

Use a consistent valuation method for every item, or be prepared to explain why you’ve toggled between book value and market value. Once this is done, add both sections to find the company’s total assets.

Example: Alex creates a spreadsheet that lists Midsize’s cash on hand, customer invoices due, and pre-paid software licenses. Because Alex used straight-line depreciation to value these assets previously, they apply the same methodology in the balance sheet.

Step 3. List liabilities

Now, repeat the same process to calculate liabilities. 

Current liabilities could include accounts payable, loans due within a year, or wage and tax obligations. 

Longer-term debts that stay on your books for more than a year, like bonds payable, mortgages, or long-term debt, go under long-term liabilities. 

Combine both, and you have your total liabilities.

Example: In a separate tab, Alex lists Midsize’s vendor bills, payroll liabilities, and the remaining balance on a multi-year equipment lease. They also flag a new short-term loan, so it’s not missed in any future reconciliation exercises.

Step 4. Calculate owners’ equity

To calculate owners' equity, subtract your business’s total liabilities from its total assets. (If your business operates as a corporation, you’ll report this as shareholder equity instead.) This number reflects how much value owners have in the company, and typically shows up as retained earnings, initial capital contributions, or stock, depending on leadership decisions. If it doesn’t match your general ledger or the previous period’s reporting balance, you need to go back over your liabilities and assets.

Example: After subtracting $280,000 in liabilities from $420,000 in assets, Alex reports $140,000 in shareholders’ equity, split between retained earnings and issued stock.

Step 5. Organize into a structure

Most balance sheets follow a standard format that mirrors the formula: assets on the left or up top, liabilities and equity on the right or below. Setting out the different line items in distinct categories helps you double-check that the balance sheet equation holds and can make it easier to spot gaps when it doesn’t. 

Example: Alex uses Midsize’s standard reporting template to format their data and verify that all the totals align. Alex’s total of $420,000 in assets matches the $280,000 in liabilities plus $140,000 in equity. 

Step 6. Review and analyze

Don’t stop at “it balances.” You need to think about what the numbers are telling you. Is the company’s debt level increasing or decreasing? Has the business grown or lost net worth? Filling out the sheet is just the beginning; you need to devote time to reviewing any trends or anomalies if you want to take confident next steps.

Example: Alex notices that current liabilities are up as compared to the previous quarter. This could potentially put a strain on Midsize’s liquidity, so Alex flags this point for review with the CFO.

Balance sheet example and template

To see how a balance sheet works in practice, take a look at this sample balance sheet. Here, we break down the three main sections—assets, liabilities, and equity—so you can see what goes into each. You’ll see how the structure follows the standard balance sheet equation of Assets = Liabilities + Equity.Note that this example reflects a sample balance sheet for just one business. If you’re looking for the financial lowdown on a corporation, search for consolidated financial statements. These typically combine data across multiple affiliated entities.

Limitations of a balance sheet

A balance sheet can tell you what your business has and doesn’t, but only at a single moment in time. It’s a financial snapshot, not a movie. You won’t see movement like trends, momentum, or seasonality. For that, you need to compare multiple periods or bring in your income statement, profit and loss statement, or cash flow statement to fill the informational gaps. 

Then there’s the issue of valuation. You can choose how to report certain numbers associated with fixed assets, inventory, or intangible assets, and the method you use affects what ends up on the sheet. You might get one number from applying fair value, for example, and another if you use cost valuation. Likewise, two companies with similar operations could show very different total assets, just because they applied different standards. 

Even when the math works out, that’s no guarantee that the story isn’t skewed. Some reports smooth over rough edges by stretching retained earnings, holding back liabilities, or inflating non-current assets. If you’re considering investing in or partnering with another business, you’ll need to dig deep and ask hard questions to clarify what the balance sheet tells you (and what it doesn’t).

Smart tools that make spend simple.

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Best practices when creating a balance sheet

The value of your balance sheet comes down to how it’s built. Clean, consistent recordkeeping and regular checks ensure that you’re moving forward based on reality and give investors a reason to view you as reliable. Playing fast and loose with either the data or the valuation, on the other hand, quietly distorts your view of what’s happening financially and torpedoes trust. These best practices help you get it right.

Keep accurate records

You can’t fix what you can’t see, so treat your recordkeeping like a source of truth, not a box-checking exercise. Misclassified expenses, overlooked prepaid expenses, or double-counted inventory can throw off the whole sheet and, by extension, your forecasts, budgeting, and risk tolerance. 

Use consistent valuation methods

When you change how you value fixed assets, cash equivalents, or intangible assets mid-stream, you render comparisons over time meaningless. Applying cost basis one year and switching to fair market value the next means you’re no longer looking at apples to apples, and that your financial statements aren’t credible. Pick a valuation method and apply it consistently, especially for long-term assets like property and other non-liquid items.

Reconcile accounts regularly

Errors in cash, accounts receivable, or accounts payable can lead you to think your business has more money in the bank than it actually does. Staying on top of reconciliation not only prevents this kind of miscounting, it can help you spot small issues like forgotten loans or misapplied payments before they mushroom into problems that throw off the entire balance sheet. Looking for funding? Investors will pay special attention to your total liabilities, so it matters that this section reflects reality.

Update frequently

Even small changes in your inventory, cash, or accrued expenses can shift your financial position more than you think, which means you can’t afford to coast on last month’s spreadsheets. A stale balance sheet can lull your leadership into a false sense of security, and outdated data seldom leads to good decisions. If you decide to take on debt or distribute retained earnings or invest in fixed assets based on old numbers, for example, you may find yourself cutting corners later on to keep up with your obligations. 

Simplify financial management with Rippling

A clean balance sheet starts with clean data, and that means accurate, up-to-date spend data. Rippling consolidates all of your company’s finances—from payroll and benefits to corporate cards and expense management–giving you a current view of cash flow across your company and offering unprecedented control over spending patterns.  

While most expense management solutions only allow for basic employee-manager approval chains, Rippling’s expense management software runs on an advanced policy engine that allows you to set hyper-custom policies based on the vendor, dollar amount, and expense category, so you can block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase. 

With Rippling you can: 

• Automatically route expenses and bills to the right approver every time. 

• Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review. 

• Close the books faster with AI-powered transaction categorization, and integration with your accounting systems. 

FAQs about balance sheets

How do you calculate the balance sheet?

To calculate the balance sheet, list all assets, then subtract total liabilities. What’s left over is equity. Or use the full formula: Assets = Liabilities + Equity. Start with current assets like cash, accounts receivable, and inventory, then add non-current assets like fixed assets and intangible assets. Next, list current liabilities and long-term liabilities, including accounts payable, loans, and accrued expenses. Finally, calculate shareholders’ equity, including retained earnings and stock, to complete the statement.

What is the balance sheet formula?

The balance sheet formula, also known as the accounting equation, is: Assets = Liabilities + Equity. It ensures that everything your business owns (assets) is either financed by what it owes ( liabilities) or by the owner’s stake (equity). If the numbers don’t match, someone made a bookkeeping error. The balance sheet equation must always stay, as the name implies, balanced. It’s how you know that your financial reporting is accurate.  

What does a balance sheet look like?

A balance sheet typically has three columns or sections, one for each category of [x]: assets, liabilities, and equity. Assets go on the left or the top, depending on what format you choose, and are split into current and non-current assets. Liabilities follow or go to the right and use the same organization. Short-term obligations first, then long-term debt. Equity, which represents the owners’ share, comes last. 

What are the uses of a balance sheet?

The main uses of a balance sheet are to show you what your business owns, what it owes, and how much value belongs to the owner or shareholders. It helps evaluate liquidity, track debt, and understand the big financial picture. A prospective lender or investor might use it to evaluate the risk, while leadership teams rely on it to guide decision-making around spending and saving. Together with the income statement and the cash flow statement, it’s the foundation of your business’s financial statements.

Who prepares the balance sheet?

Accountants, bookkeepers, or business owners typically own the process of preparing the balance sheet. In a larger company, it might be handled by the finance teams or a CPA. Small businesses with lean teams typically rely on accounting software to generate it automatically. Regardless of who prepares your balance sheet, accuracy is key because the balance sheet reflects your business’s financial health. Investors and lenders rely on it to assess your assets, liabilities, and equity at a specific point in time.