How to Prepare a Balance Sheet: 5 Steps

balance sheet formula

Deferred revenue represents cash received from customers as deposits before goods are shipped or services are performed. Deferred revenue is a liability because the company still has a performance obligation. A screenshot of ServiceNow, Inc.’s comparative Consolidated Balance Sheets for December 31, 2021, and December 31, 2020, is shown below. The source is its 10-K annual report in an SEC company filing dated February 3, 2022. All of the above ratios and metrics are covered in detail in CFI’s Financial Analysis Course.

  • Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios.
  • All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
  • The current ratio measures the percentage of current assets to current liabilities.
  • Thus, the accounting formula essentially shows that what the firm owns (its assets) has been purchased with equity and/or liabilities.
  • Because the two sides of this balance sheet represent two different aspects of the same entity, the totals must always be identical.
  • When analyzed over time or comparatively against competing companies, managers can better understand ways to improve the financial health of a company.

Publicized balance sheets often don’t reveal much of the financial knowledge that could be useful to you as an investor, such as the amount spent on specific projects. That can be useful, as it lets you know that the company is reinvesting in itself, but not much else is helpful about it. The debt-to-equity ratio shows how much debt a company has, compared to its equity.


A balance sheet should do exactly what it sounds like it should do … balance. If it doesn’t, you need to find the discrepancy and pinpoint the accounting errors you made. Otherwise, you could wind up with inaccurate financial records and reports. We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

balance sheet formula

Double check that all of your entries are, in fact, correct and accurate. You may have omitted or duplicated assets, liabilities, or equity, or miscalculated your totals. A company’s balance sheet is one of the most important financial statements it produces—typically on a quarterly or even monthly basis (depending on the frequency of reporting). You’d have to decrease your cash and debt accounts on the balance sheet, but you’d also have to increase your interest expense on the income statement. The primary connection between your balance sheet and income statement is that your net income flows from your income statement into the retained earnings account on your balance sheet. Generally, income statements are better for analyzing your business’s profitability.

Financial statements

Knowing how to calculate retained earnings helps business owners to perform a more in-depth financial analysis. Also, the statement of retained earnings allows owners to analyse net income after accounting for dividend payouts. Owners should calculate the statement of retained earnings at Online Bookkeeping Services for Small Businesses the end of each accounting period, even if the amount of dividends issued was zero. There are a variety of accounting formulas for businesses that can be used for a variety of purposes, such as producing a statement of cash flows, reviewing inventory turnover, and analysing total sales.

  • Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos.
  • However, equity can also be thought of as investments into the company either by founders, owners, public shareholders, or by customers buying products leading to higher revenue.
  • One way to check for poor or greedy board members and executives is to look for signs of good will toward the long-term owner or shareholder.
  • Your balance sheet should document your company’s assets, liabilities, and equity.
  • Retained earnings are net profits that are not returned to shareholders in the form of dividends but are retained in the business for future investment.
  • This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report.
  • He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.

Current liabilities are due within one year and are listed in order of their due date. Long-term liabilities, on the other hand, are due at any point after one year. Using Apple’s 2022 earnings report, we can find all the information we need to fill in the accounting equation. However, equity can also be thought of as investments into the company either by founders, owners, public shareholders, or by customers buying products leading to higher revenue. The term liquidity refers to the ability of a company to pay its short-term liabilities as and when they are due for payment.

Accounts Receivable

However, there are several “buckets” and line items that are almost always included in common balance sheets. We briefly go through commonly found line items under Current Assets, Long-Term Assets, Current Liabilities, Long-term Liabilities, and Equity. A bank statement is often used by parties outside of a company to gauge the company’s health.