- What is a balance sheet?
- The balance sheet equation
- How to make a balance sheet
- Balance sheet format and templates
- Common balance sheet mistakes to avoid
- Using financial ratios to analyze your balance sheet
- Using your balance sheet for business decisions
- Why a balance sheet matters for your business
- Take control of your financial reporting with Ramp
A balance sheet shows whether your business is on solid footing or headed for trouble. It summarizes what you own, what you owe, and what’s left over—so you can judge financial health at a specific point in time. Most companies prepare one at the end of each month, quarter, or year to spot trends and make decisions with confidence.
Building a reliable balance sheet doesn’t have to be complicated. In just a few simple steps, you can capture a clear view of your company’s financial health.
What is a balance sheet?
A balance sheet is a financial statement that communicates your company’s “book value”—shareholders’ equity—calculated as total assets minus total liabilities. It provides a snapshot at a moment in time, broken into assets, liabilities, and equity:
| Category | Description | Examples |
|---|---|---|
| Assets | Everything your business owns, divided into current assets (convertible to cash within a year) and non-current assets (long-term resources) | Current: Cash, accounts receivable, inventory, prepaid expenses; Non-current: Property and equipment, intangible assets, long-term investments |
| Liabilities | What your business owes, classified into current (due within a year) and long-term (due after a year) | Current: Accounts payable, short-term loans, wages payable, interest payable; Long-term: Long-term debt, deferred tax liabilities, pension obligations |
| Equity | The owner’s/shareholders’ residual interest after liabilities | Common stock, retained earnings, additional paid-in capital |
Assets
Assets are everything your company owns that has monetary value and helps generate revenue. They fall into two categories:
- Current assets: What you expect to convert into cash within a year, such as cash and cash equivalents, accounts receivable, inventory, and prepaid expenses
- Non-current assets: Resources held for more than a year, like property and equipment, patents, trademarks, and other intangible assets
Together, these asset categories give you a complete view of your company's resources and their availability for operations and growth.
Liabilities
Liabilities are the financial obligations your company owes to external parties, from suppliers to lenders. They fall into two categories:
- Current liabilities: Due within a year—e.g., accounts payable, short-term loans, wages payable
- Long-term liabilities: Due after a year—e.g., long-term debt and deferred tax liabilities
The distinction between current and long-term liabilities helps you plan your cash flow and manage your company's debt obligations effectively.
Owner's equity
Owner's equity represents the residual interest in the company's assets after deducting all liabilities. In simple terms, it's what would be left over if you sold everything the company owns and paid off all its debts.
If a company is privately held by a single owner, owner’s equity will be relatively straightforward. However, if it's publicly held, this calculation may become more complicated depending on the various types of stock issued, including common stock, preferred stock, and retained earnings.
The balance sheet equation
The foundation of every balance sheet is the accounting equation:
Assets = Liabilities + Equity
This equation shows how a company finances its assets—e.g., through debt or through owner and shareholder investment. If the two sides don’t match, something’s off in your numbers.
How to make a balance sheet
Creating a balance sheet is straightforward if you follow a simple step-by-step process. Here’s how to make a balance sheet step by step:
1. Create a header
This will help you quickly recognize the balance sheet among your financial documents. Title the document "Balance Sheet," then add your company name and the date for the end of the fiscal year or quarter.
2. Gather financial data
You’ll need to include:
- Bank statements
- Accounts receivable records
- Accounts payable records
- Inventory reports
- Loan documents
- Depreciation schedules
Having this documentation ready before you start will make the process smoother and help prevent errors in your final balance sheet.
3. List your assets
List all your assets, separating them into current and non-current categories.
Current assets include:
- Cash and cash equivalents: Physical currency, checking accounts, and short-term investments
- Accounts receivable: Money customers owe you
- Inventory: Goods for sale or use in production
- Prepaid expenses: Payments made in advance for services or goods to be received later, such as insurance or rent
Non-current assets include:
- Fixed assets: Property, buildings, machinery, and equipment
- Intangible assets: Intellectual property, patents, trademarks, or goodwill
To calculate total assets, add the value of both current and non-current assets.
4. List your liabilities
List all your liabilities—financial obligations owed to other parties, such as suppliers, banks, or employees. Like assets, liabilities are divided into two categories.
Current liabilities (due within a year) include:
- Accounts payable: Money owed to suppliers
- Short-term loans: Loans or credit lines due soon
- Wages payable: Employee salaries and benefits owed
Long-term or non-current liabilities (due after more than a year) include:
- Long-term debt: Loans or bonds due beyond one year
- Deferred tax liabilities: Taxes owed but deferred to future periods
Sum the value of your current and long-term liabilities to arrive at your total liabilities.
5. Calculate owner’s equity
Calculate owner’s equity—or shareholders’ equity for corporations—by subtracting your total liabilities from your total assets:
Owner’s equity = Total assets – Total liabilities
To calculate shareholders’ equity, use this formula:
Shareholders’ equity = Common stock + Additional paid-in capital + Retained earnings – Treasury stock
Equity can include:
- Common stock (for corporations)
- Paid-in capital (the amount of money investors have directly contributed in exchange for shares of stock)
- Retained earnings (profits kept in the business for reinvestment)
- Owner’s capital (for sole proprietorships or partnerships)
This final calculation completes your balance sheet and confirms that your assets equal the sum of liabilities and equity.
6. Verify your balance
Double-check the accounting equation:
Assets = Liabilities + Equity
If the balance sheet doesn’t balance, you may have made an error in listing or classifying assets, liabilities, or equity. Double-check your calculations and recategorize any items as necessary.
Balance sheet format and templates
Balance sheets can be organized in different ways, but they all follow the same basic accounting equation. To make things easier on yourself, you can use a pre-made balance sheet template.
Standard balance sheet format
Most balance sheets display assets on the left and liabilities plus equity on the right, with items listed by liquidity (most liquid first). Here’s a simple example:
ABC Company Balance Sheet
As of December 31, 2024
| ASSETS | Amount | LIABILITIES & OWNER'S EQUITY | Amount |
|---|---|---|---|
| Current assets | Current liabilities | ||
| Cash and cash equivalents | $50,000 | Accounts payable | $25,000 |
| Accounts receivable | $35,000 | Short-term loans | $15,000 |
| Inventory | $40,000 | Total current liabilities | $40,000 |
| Prepaid expenses | $5,000 | ||
| Total current assets | $130,000 | Long-term liabilities | |
| Long-term debt | $80,000 | ||
| Non-current assets | Total long-term liabilities | $80,000 | |
| Property and equipment | $150,000 | ||
| Patents and trademarks | $20,000 | TOTAL LIABILITIES | $120,000 |
| Total non-current assets | $170,000 | ||
| OWNER'S EQUITY | |||
| TOTAL ASSETS | $300,000 | Paid-in capital | $100,000 |
| Retained earnings | $80,000 | ||
| TOTAL OWNER'S EQUITY | $180,000 | ||
| TOTAL LIABILITIES & EQUITY | $300,000 |
Common balance sheet mistakes to avoid
To make sure your balance sheet is accurate, watch out for these common errors:
Misclassifying assets
Avoid listing non-current assets as current assets. Non-current assets, such as property and equipment, are long-term resources and should only appear under the non-current section. Misclassifying them as current can distort your liquidity ratios and misrepresent your ability to cover short-term obligations.
Omitting liabilities
Always include both current and non-current liabilities. Current liabilities, such as accounts payable and short-term loans, are due within a year. Long-term liabilities, such as long-term debt and deferred tax liabilities, are due after a year. Missing either category can lead to an incomplete picture of your financial position and may result in errors when assessing your solvency.
Failing to update depreciation
Regularly update depreciation on fixed assets to reflect their true value. As assets such as machinery or vehicles lose value over time, you must account for depreciation. Failing to update depreciation can overstate the value of your non-current assets and affect the equity section, which could lead to incorrect financial reporting.
Miscalculating equity
Make sure your owner’s equity or shareholder equity reflects the actual net worth of the company. You should calculate equity as total assets minus total liabilities. If there’s an error in asset or liability totals, it can result in an inaccurate equity figure, giving a false impression of your company’s financial health.
Using financial ratios to analyze your balance sheet
Once you've created your balance sheet, you can use key financial ratios to help you assess your company’s financial liquidity, solvency, and profitability. Here are some of the most commonly used ratios derived from balance sheet data:
Liquidity ratios
Liquidity ratios are financial metrics that measure your company's ability to pay off its short-term debts and obligations using its available assets. They help you assess whether your business has enough liquid resources, such as cash or assets that can quickly be converted to cash, to cover immediate liabilities.
The most common liquidity ratios include:
| Ratio | Formula | What it indicates |
|---|---|---|
| Current ratio | Current assets / Current liabilities | Short-term liquidity |
| Quick ratio | (Current assets – Inventory) / Current liabilities | Immediate liquidity |
| Debt-to-equity | Total liabilities / Shareholders’ equity | Leverage |
| Debt-to-asset | Total liabilities / Total assets | Debt share of assets |
| Return on assets | Net income / Total assets | Asset efficiency |
| Return on equity | Net income / Shareholders’ equity | Equity efficiency |
Current ratio
The current ratio measures your company’s ability to cover its short-term obligations with its short-term assets. Here’s the formula to calculate:
Current ratio = Current assets / Current liabilities
If your current assets are $50,000 and current liabilities are $25,000, your current ratio would be 2.0:
Current ratio = $50,000 / $25,000 = 2.0
A ratio above 1 means your company can cover its short-term liabilities with its short-term assets. Below 1 suggests you may struggle to meet short-term obligations. For example, apparel manufacturing has an average current ratio of 1.99, while airlines’ average current ratio is 0.61.
Quick ratio
The quick ratio, also known as the acid-test ratio, measures your company's ability to cover short-term liabilities with its most liquid assets, excluding inventory. Here’s the formula:
Quick ratio = (Current assets – Inventory) / Current liabilities
If your current assets are $50,000, inventory is $10,000, and current liabilities are $25,000, the quick ratio would be 1.6:
Quick ratio = ($50,000 – $10,000) / $25,000 = 1.6
The quick ratio provides a more conservative measure of liquidity, excluding inventory, which you may not always be able to liquidate easily. A quick ratio above 1 indicates solid liquidity. For example, broadcasting has an average quick ratio of 1.28, while the average quick ratio for auto manufacturers is 0.7.
Leverage ratios
Leverage ratios measure how much your company relies on debt to finance its operations and assets. They show the relationship between your company's debt and its equity or assets, helping you assess financial risk and the company's ability to meet long-term obligations.
The most common leverage ratios include:
Debt-to-equity ratio
The debt-to-equity ratio shows how much debt your business has compared to the equity invested by the owners or shareholders. You can use the following formula to calculate it:
Debt-to-equity ratio = Total liabilities / Shareholders’ equity
If your total liabilities are $100,000 and equity is $50,000, the debt-to-equity ratio would be 2.0:
Debt-to-equity ratio = $100,000 / $50,000 = 2.0
A higher ratio suggests that your company is heavily reliant on debt to finance its operations, which can be risky in the event of financial downturns. A lower ratio suggests a more conservative approach to financing. For example, resorts and casinos have an average debt-to-equity ratio of 2.22, according to data from FullRatio, whereas internet retail’s average debt-to-equity ratio is just 0.32.
Debt-to-asset ratio
This ratio, also simply called the debt ratio, calculates how much of your business’s assets were purchased through debt rather than equity. You can calculate the debt-to-asset ratio with this formula:
Debt-to-asset ratio = Total liabilities / Total assets
If your total liabilities are $50,000 and your total assets are $100,000, your debt ratio is 0.5.
Debt-to-asset ratio = $50,000 / $100,000 = 0.5
A higher debt-to-asset ratio indicates that a larger portion of your company's assets are financed through debt rather than equity. A lower ratio suggests that your company owns more of its assets outright, providing a stronger financial foundation and more room to borrow if needed in the future. A debt ratio of 0.5 is generally considered less risky.
Profitability indicators
Profitability is a company's ability to generate earnings relative to its revenue, assets, or equity over a specific period of time. There are two key formulas that help you determine the profitability of your business:
Return on assets (ROA)
The return on assets measures how efficiently your company is using its assets to generate profit. The formula is:
ROA = Net income / Total assets
If your net income is $20,000 and total assets are $200,000, the ROA would be 10%.
ROA = $20,000 / $200,000 = 0.1 = 10%
A higher ROA indicates your company is effectively using its assets to generate profits. This ratio helps you compare how well different companies or industries convert their investments in assets into earnings, making it valuable for assessing operational efficiency.
Return on equity (ROE)
The return on equity measures how efficiently your company is using its equity to generate profit. Here’s the formula:
ROE = Net income / Shareholders’ equity
If your net income is $20,000 and equity is $100,000, the ROE would be 20%.
ROE = $20,000 / $100,000 = 0.2 = 20%
A higher ROE indicates your company is effectively using shareholder funds to generate profits. It’s an important metric for investors to assess the profitability of the business.
Monitoring these financial ratios can help you stay on top of your business's liquidity, solvency, and profitability. Use them to identify areas where you need improvements or to validate business strategies.
Using your balance sheet for business decisions
Your balance sheet is more than just a tool for tracking assets and liabilities; it plays a key role in shaping your financial strategy. Here are a few real-life scenarios where your balance sheet directly affects critical business decisions:
Taking out a loan
When you apply for a business loan, lenders will often look closely at your balance sheet to assess your financial position. Here’s how the balance sheet influences their decision:
- Total assets: Lenders want to know if you have enough liquid assets or non-current assets, such as equipment or real estate, to back up the loan
- Liabilities: Lenders will review your current liabilities to ensure you can meet your short-term obligations while taking on new debt
- Owner’s equity: A strong equity position indicates to lenders that the business is well-capitalized
Example: If your current ratio (Current assets / Current liabilities) is 2.5, it indicates you have 2.5x the assets needed to cover your short-term liabilities. Lenders might view this as a positive sign when considering your loan application.
Planning an expansion
When planning an expansion, whether through new product launches, hiring more staff, or opening new locations, your balance sheet can help you decide whether you can afford the costs or need to secure additional funding.
- Assessing retained earnings: If your retained earnings are substantial, you might choose to reinvest these profits into the expansion rather than taking on additional debt or equity financing
- Identifying available credit: The balance sheet shows whether you have available credit or if you’re close to reaching your credit limits, which could affect financing options for the expansion
Example: If your total liabilities are too high relative to shareholder equity, it might be a warning sign that taking on more debt could hurt your financial stability during the expansion.
Monitoring cash flow and profitability
Regularly updating your balance sheet gives you insights into whether your business is on track to meet cash flow targets. For example, if your accounts receivable are high but cash on hand is low, it might signal that you're not collecting payments quickly enough.
- Liquidity analysis: The quick ratio and current ratio will show whether you have enough liquid assets to meet upcoming expenses
- Profitability check: The balance sheet helps assess your retained earnings, which show whether your business is generating enough profits to reinvest or pay out dividends
Example: A debt-to-equity ratio of 3.0 may indicate that your business is heavily reliant on debt, making it less profitable and risky in the long term. This information helps you adjust strategies for profitability.
Attracting investors
Investors look at balance sheets to understand the financial health of a business before committing capital. A strong balance sheet signals to investors that the company is in a good position to provide returns while managing risks.
- Assets: Investors want to see whether the company has valuable assets—intangible assets such as intellectual property or fixed assets such as real estate
- Liabilities: A low debt-to-equity ratio indicates to investors that the business is not overly leveraged and carries less financial risk
Example: If you're seeking venture capital to fund a new project or product, a healthy balance sheet with manageable liabilities and strong equity might make investors more comfortable with the risk.
Why a balance sheet matters for your business
A balance sheet is crucial for assessing financial health. It shows whether your business has enough assets to cover its liabilities and highlights the equity that owners or shareholders have in the company.
A balance sheet helps you:
- Measure financial health: You can see if your company is liquid enough to cover short-term obligations or if you have enough assets to pay off debt
- Attract investors and secure loans: Investors and lenders look at your balance sheet to determine your company’s financial position before making decisions
- Support better business decisions: A balance sheet is essential for budgeting, strategic planning, and cash flow management
- Track performance with key ratios: Ratios such as current ratio, quick ratio, and debt-to-asset ratio let you monitor liquidity, leverage, and financial stability at a glance
Regular balance sheet reviews give you the insights needed to steer your business toward long-term financial success and growth.
Take control of your financial reporting with Ramp
Accurate financial reporting is essential for making informed business decisions, and your balance sheet is at the heart of that process. With Ramp’s accounting automation software, you can eliminate complexity and time-consuming data entry, ensuring your balance sheet is always up-to-date and accurate.
By automating accounting tasks, you reduce human error, save time on reconciliation, and gain real-time insights into your financial health. This simplifies the balance sheet creation process and provides clarity needed for strategic decision-making.
With Ramp’s automation, your finance team can focus on what truly matters—driving growth and profitability—while leaving the repetitive tasks to the software.
Try an interactive demo and see how Ramp helps you close your books faster.
FAQs
No, you only list assets, liabilities, and equity on the balance sheet. Expenses are typically recorded on the income statement.
Current liabilities are due within one year, such as accounts payable and short-term loans. Long-term liabilities are obligations due after one year, such as long-term debt and pension fund liabilities.
Update your balance sheet monthly or quarterly to keep track of your financial position. For larger businesses, quarterly updates are common.
If your balance sheet doesn’t balance, check for errors in the classification of assets or liabilities or incorrect depreciation entries.
Tools like Ramp that integrate with popular accounting software are great for automating the balance sheet creation process, ensuring accuracy, and saving time.
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