Balance sheets may be constructed using accounting software. Or, you can simply create a spreadsheet or written list with two columns that can be used to total your assets and liabilities by category. [2] X Research source
Your current assets include the cash you have on hand and what could be liquidated quickly, usually within a year. In this category, you would have things like your accounts receivable (what people owe your company), any securities becoming due with a year such as bonds or savings accounts, and your inventory. It can also include pre-payments or deposits you’ve made ahead of time, such as insurance for the next year. Fixed assets are tangible and known as property, plant, and equipment. These are assets with a useful life in excess of one year. There are also intangible assets that may be held on a balance sheet. These include patents, brand recognition, and copyrights, along with other non-physical assets. [4] X Research source All of these assets need actual dollar figures in your balance sheet, these can be calculated exactly or estimated based on (and in compliance with) industry convention.
Current liabilities include things like what you owe on lines of credit and credit cards, as well as anything owed to other companies for goods and supplies. It also includes the income and wages you’ve paid out to employees and taxes owed, along with unpaid rent and utilities. [6] X Research source Long-term liabilities include long-term loans payable, bonds payable, and other liabilities that will be paid out over a time period longer than one year. [7] X Research source
Have a line for your total assets. Below it, have a line for your total liabilities. Show what the shareholder’s equity is when you subtract the second from the first.
When you’ve listed these categories out, sum them up to arrive at total shareholder’s equity. [9] X Research source Compare your total to the difference between assets and liabilities from your earlier calculations. If the figures don’t match, either you or the accountant that keeps the company’s books has made a mistake somewhere along the way. Many balance sheets are organized such that the assets are totaled on the left and liabilities and shareholder’s equity are totaled on the right. This provides a more literal representation of the basic accounting equation.
Unlike the balance sheet, the income statement covers financial activity throughout the period in question, whether that is a month, a quarter, or a year. The income statement is organized as a reduction of net sales by various expenses faced by the company to arrive at net income (also called net profit or the bottom line). [11] X Research source
Separate these expenses into three major categories: selling, general and administrative expenses. When you’ve written out the amount of each expense, total them to find total operating expenses. Subtract total operating expenses from gross profit to arrive at operating income. [15] X Research source
Put the net sales on one line. Underneath that, put the cost of sales. Below that, subtract the cost of sales from the net sales to get the gross profit. Skip a line before moving on to operating costs. Put the operating costs in general categories underneath the gross profit. Generally, selling, general, and administrative costs are lumped into one, but not always. Underneath that, write the operating income that you derived from subtracting the operating costs from the gross profit. [17] X Research source Next, have a line each for the interest and the taxes. You can subtract them separately or together. Separately gives you more precise data. The final line should be the net income. [18] X Research source
The statement of cash flows is split into three pieces: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. [20] X Research source
Amortization is when the company spreads out the cost of something over time for accounting purposes. However, it is not really a cost taking away from cash flow right now. Therefore, you add that expense back in. [22] X Research source The same with depreciation. It’s a number taken away from the total amount of an asset, as it loses value over time. However, it’s not technically a cash flow problem, so that expense is added back in. [23] X Research source This method is the indirect method of figuring out cash flow. The direct method involves adding up cash flows from scratch rather than starting with net income. [24] X Research source
If you have sold fixed assets within the period, such as property, you need to look at whether it was a gain or loss, then add or subtract it from the operating costs. You also need to look at changes in accounts receivable. Since accounts receivable is what other people owe the company if it goes down, that means the company has gained cash, and that needs to be added in. On the other hand, if the company has bought inventory, that signals a decrease in cash and needs to be subtracted from the cash flow. Other items that can affect the cash flow include taxes payable, insurance you’ve already paid, and salaries payable. [26] X Research source
This step can include money you’ve put into new equipment or other capital, such as buildings, which will be subtracted from cash flow. [28] X Research source It can also be equipment you’ve sold, which would be added to the cash flow. This step also includes any money invested in the stock market, what you’ve bought and sold, and how that affects your overall cash. [29] X Research source
Loans are added to your overall cash. However, your loan payments for the year are taken out of the overall cash. [32] X Trustworthy Source U. S. Small Business Administration U. S. government agency focused on supporting small businesses Go to source Dividends you pay out to shareholders obviously reduces your cash, while if you issue bonds or common stock, the issue is recorded as an influx of cash. [33] X Research source
Add in last year’s cash. If you have any cash left over from last year or you started out with a deficit, add that or subtract that to this year’s cash. That will give you the total amount of cash you have on hand, also called your total cash resources. [35] X Research source
