A balance sheet is a fundamental financial statement that provides a snapshot of a business's financial position at a specific point in time. It outlines what the business owns (assets), what it owes (liabilities), and the owner's equity. Understanding and accurately preparing a balance sheet is crucial for assessing financial health, making informed decisions, and ensuring compliance with financial regulations.
What is a balance sheet?
A balance sheet is a financial statement that shows what your business owns and owes at a specific point in time. It’s based on a simple formula:
Assets = Liabilities + Owner’s Equity
This means everything the business owns (assets) is either financed by borrowing (liabilities) or by the owner’s investment (equity).
Unlike a profit and loss statement, which covers a period of time, a balance sheet is a snapshot. It’s most often used to understand your business’s financial health and can help track how it changes over time.
Why is a balance sheet important?
A balance sheet is vital for several reasons:- Financial health assessment: It provides insights into the company's liquidity, solvency, and overall financial stability.
- Decision-making: Investors, creditors, and management use balance sheets to make informed decisions regarding investments, lending, and strategic planning.
- Regulatory compliance: Accurate balance sheets are essential for tax reporting and compliance with financial regulations.
- Performance tracking: Comparing balance sheets over different periods helps track financial performance and growth.
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Key components of a balance sheet
A balance sheet is typically divided into three main sections:
1. Assets
Assets are resources owned by the business that have economic value. They are typically categorized into:
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Current assets: Assets expected to be converted into cash or used within a year. Examples include:
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Cash and cash equivalents
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Accounts receivable
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Inventory
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Prepaid expenses
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Non-current assets: Long-term investments not expected to be converted into cash within a year. Examples include:
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Property, plant, and equipment (PP&E)
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Intangible assets (e.g., patents, trademarks)
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Long-term investments
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2. Liabilities
Liabilities are obligations the business owes to external parties. They are classified into:
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Current liabilities: Obligations due within one year. Examples include:
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Accounts payable
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Short-term loans
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Accrued expenses
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Taxes payable
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Non-current liabilities: Obligations due after one year. Examples include:
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Long-term loans
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Bonds payable
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Deferred tax liabilities
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3. Owner’s equity
Owner’s equity represents the owner's residual interest in the business after liabilities are subtracted from assets. It includes:
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Capital invested: Funds invested by the owner(s).
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Retained earnings: Accumulated profits reinvested in the business.
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Drawings: Withdrawals made by the owner(s) for personal use (deducted from equity).
How to create a balance sheet
Creating a balance sheet involves the following steps:
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Determine the reporting date: Choose the specific date for which the balance sheet is prepared (e.g., 30 June 2025).
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List assets: Itemise all current and non-current assets with their respective values.
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List liabilities: Itemise all current and non-current liabilities with their respective values.
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Calculate owner’s equity: Subtract total liabilities from total assets to determine equity.
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Ensure the balance sheet balances: Verify that total assets equal the sum of total liabilities and owner’s equity.
Balance sheet example
Below is a simplified balance sheet example for an Australian business as of 30 June 2025:
| Balance sheet | As at 30 June 2025 |
|---|---|
| Assets | |
| Current assets | |
| Cash and cash equivalents | $50,000 |
| Accounts receivable | $25,000 |
| Inventory | $15,000 |
| Prepaid expenses | $5,000 |
| Total current assets | $95,000 |
| Non-current assets | |
| Property, plant & equipment | $150,000 |
| Intangible assets | $20,000 |
| Total non-current assets | $170,000 |
| Total assets | $265,000 |
| Liabilities | |
| Current liabilities | |
| Accounts payable | $30,000 |
| Short-term loans | $10,000 |
| Accrued expenses | $5,000 |
| Total current liabilities | $45,000 |
| Non-current liabilities | |
| Long-term loans | $50,000 |
| Total non-current liabilities | $50,000 |
| Total liabilities | $95,000 |
| Owner’s equity | |
| Capital invested | $100,000 |
| Retained earnings | $70,000 |
| Total owner’s equity | $170,000 |
| Total liabilities and equity | $265,000 |
Common mistakes to avoid
When preparing a balance sheet, be mindful of the following common errors:
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Incorrect classification: Misclassifying assets or liabilities can lead to inaccurate financial analysis.
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Omitting assets or liabilities: Failing to include all relevant items can misrepresent the business's financial position.
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Not updating values: Using outdated or estimated figures without proper notation can affect accuracy.
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Imbalance: Ensure that total assets equal total liabilities plus owner’s equity.
How Budgetly can assist
While Budgetly is primarily known for its expense management solutions, accurate expense tracking directly impacts the accuracy of your balance sheet. By providing real-time visibility into business expenses, Budgetly helps ensure that your financial records are up-to-date and accurate. This accuracy is crucial when preparing financial statements like the balance sheet, as it relies on precise data regarding assets and liabilities.
With Budgetly, businesses can:
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Monitor expenses in real time: Gain immediate insights into spending, aiding in accurate asset and liability reporting.
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Categorise expenses accurately: Ensure that expenses are correctly classified, which is essential for financial reporting.
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Integrate with accounting software: Seamlessly sync with platforms like Xero, facilitating the preparation of financial statements.
By maintaining accurate and timely expense records, Budgetly supports businesses in creating precise balance sheets, contributing to better financial decision-making.
Final thoughts: Building financial clarity with better tools
Understanding your balance sheet is essential, but so is knowing the data behind it is correct. With smart expense tracking and real-time visibility, you can ensure your financial statements are not only accurate—but actually useful.
Want to see how Budgetly fits into your finance workflow?
Schedule a demo with us today, or watch a 10-minute recorded demo!
