April 27, 2021 By SmartBiz Team

When you’re applying for small business financing, you’ll probably find that a balance sheet is required. Learn more about this document so you know what to expect.

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What is a Balance Sheet?

A balance sheet is a document that provides a snapshot of a company’s financial health at a specific point in time. You can use them regularly to see your business’s net worth and to provide lenders with an idea of how much you own, debts owed, and how much you invest in your operations. Also, several important calculations can be derived from the data on a balance sheet, including the debt-to-equity ratio. To learn about the important debt-to-equity ratio, review this post on the SmartBiz Small Business Blog here.

Keep in mind, though, that a balance sheet taken on its own won’t reveal any trends in the business’s finances. To get a sense of a business’s finances over time, lenders will often require an income statement as well.

Wondering where the key differences lie? Learn all about them on the SmartBiz Small Business Blog.

What Is a Balance Sheet Used For?

You’ll prepare a balance sheet to find out whether your small business can take on additional financing commitments such as loans. You can also use it to determine your shareholder equity, net worth, and total liabilities. Both you and potential partners such as investors may find this information useful. Small business lenders such as the Small Business Administration (SBA) are especially likely to request these financial statements.

Basic Equation

A balance sheet is based on this equation:

Assets = Liabilities + Owner’s Equity

To translate this formula into a more intuitive statement, a business owner has to expense all the company’s assets by either borrowing capital (taking on liabilities) or investing personal funds (issuing owner’s equity).

Main Elements on a Balance Sheet

Here’s how a balance sheet breaks down.


Current assets can be turned into cash within a year of the date. On a balance sheet, they’re ordered in terms of relative liquidity, which is a measure of how quickly an item can become cash. Some common assets include:

  • Cash : funds in your checking or savings accounts

Marketable securities: stocks, bonds, and other short-term investments

  • Accounts receivable: money your clients or customers owe
  • Inventory: products ready to be sold
  • Prepaid expenses: insurance, rent, contracts, and other payments made in advance

Next come long-term or non-current assets. These represent items like investments, commercial real estate, large equipment, and intellectual property that will be useful to the company for more than a year.


In contrast to assets, liabilities represent the amounts that a company owes. Current liabilities, those due within a year of the balance sheet date, can include:

  • Bills: credit cards, rent, utilities, etc.
  • Accounts payable : money your business owes to suppliers, vendors, or partners
  • Wages payable: employee compensation including insurance benefits
  • Taxes owed: federal and state taxes owed for that year
  • Loan payments: any upcoming interest payments on outstanding debt

Long-term or fixed liabilities might be long-term debt, mortgages, bonds, and pension fund obligations.

Owner’s Equity

The final category on a balance sheet is owner’s equity. In this section, you’ll find the capital that the owner can contribute and the retained earnings. This term describes the profit a company earned over a certain period of time and is used either to reinvest in the business or to pay off debt. Other items might include common stock.


A balance sheet will typically have each of the three main sections broken down line by line and calculated as a sum of the individual amounts. Ultimately, the total assets should equal the sum of the total liabilities and the total owner’s equity. This is a good test for whether the document was put together correctly.

For an editable Excel template, check out this resource from the Small Business Administration!

Once your balance sheet is completed and double-checked, you can use it to get an understanding of your business’s financial health at that given moment.

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How to Create a Balance Sheet

Take the following steps to create a balance sheet:

1. List your current cash balance.

The top line of your balance sheet should state the cash currently in your business bank account or accounts.

2. List your marketable securities.

The second line of your balance sheet should be the amount of money you currently have in assets that can be converted into cash quickly, such as stocks, bonds, and other short-term investments. To calculate this sum, log into all your investment accounts, then add together all their total values.

3. List your accounts receivable balance.

As described earlier, the cash in your bank account does not always fully reflect your company’s net worth or net income. An unpaid invoice still in accounts receivable could hinder your cash flow. To account for this gap, the third line of your balance sheet should detail any money you owe to others.

4. List your inventory.

The value of your inventory should be the fourth line of your balance sheet. You can determine your inventory’s value by adding the sale prices (the amount for which you actually sell your goods, not their MSRPs) of all items you’re currently selling.

5. List your fixed assets.

Add the value of items you own such as land, buildings, or equipment. The sum will be the fifth item of your balance sheet.

6. List your total assets.

The sixth line of your balance sheet is your total assets, which is simply the sum of the five lines before it.

7. List your total usual bills.

After you list your total assets, you’ll move on to your liabilities, starting with your total usual bills. Here, you’ll add your typical business expenses such as rent, utilities, and credit card payments and record the total as your seventh line item.

8. List your accounts payable.

The eighth line of your balance sheet will be the money that your company is still owed for unpaid invoices. Add together all the vendor, supplier, and partner payments you owe to arrive at this number.

9. List your wages payable.

Running a successful business means paying a sizable amount of money to your employees, and your balance sheet should reflect this spending. That’s why, on your balance sheet, your ninth line item is your wages payable. To calculate it, add all the wages, including benefit premiums and contributions, you paid your employees during the period in question.

10. List your taxes.

Use the federal, state, and local tax rates applicable to your business to calculate your tax liability. Then, list the total of these taxes as your 10th line item.

11. List your loans.

Add all your loan payments, loan fees, interest, and other debt-related costs. Record the total as your 11th line item.

12. Add together all your liabilities and list them.

Your 12th list item will be your total liabilities. To arrive at this number, add all the items mentioned in this list after the total assets line item.

13. List your owner’s equity.

Your 13th line item should be your shareholders’ equity. You can determine this figure by adding together your common stock, retained earnings, and other accumulated comprehensive income or loss.

14. List the sum of your liabilities and owner’s equity.

The final line item of your balance sheet should be the sum of your liabilities and your shareholders’ equity. Find an example of how this all looks in execution below.

Balance Sheet Example

A balance sheet that follows all the above rules might look like this:

Your Business Name
Balance Sheet

Marketable Securities
Accounts Receivable
Fixed Assets
Total Assets
Accounts Payable
Wages Payable
Total Liabilities
Total Owner's Equity
Total Liabilities Plus Owner's Equity

Does a Balance Sheet Always Balance?

Yes. Since a balance sheet is predicated on the notion that assets always equal the sum of your liabilities and owner’s equity, your total assets line item should always equal your final line item. If not, go back to the drawing board to figure out where your numbers have gone wrong, then retry making your balance sheet. You’ll know your numbers are correct when both your assets line item and your final line item are equal.

Next Steps

A balance sheet is one of the most commonly requested documents in small business lending. This financial statement, along with others, will give lenders an inside look at your unique business. If you’re considering an SBA loan, the “gold standard” in the industry, find the SmartBiz requirements here.

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