Balance: meaning, drafting & examples

Introduction

As an entrepreneur, you can't get away from it: taking stock. Of course, you already do this proverbially on a regular basis. You can take stock at the end of the year and look back at what went well or not so well last year. But for the tax authorities, you actually have to draw up a balance sheet on paper every year. How do you do that? What is a balance sheet anyway?

Balance: meaning and explanation

You have probably already largely forgotten the explanation of the balance sheet in economics years ago. Therefore, below we briefly explain the meaning of "balance sheet" as well as a number of other important concepts that appear on the balance sheet.

What is "balance sheet? A balance sheet is a statement of all the assets and liabilities and equity of your business. The amounts below are put into two different columns of a table and added together. At the bottom of the line, both columns should have the same amount come out to the balance sheet total.

Because the amount of your assets, liabilities and equity can change daily, a balance sheet is a snapshot in time. The balance sheet gives a good picture of how a company is doing. Think about solvency and liquidity. The balance sheet is a required part of the financial statements and shows you annually whether your business has grown over the past year compared to the beginning balance sheet you started the year with.

Whereas you used to go to an accountant for your balance sheet and bookkeeping, there are now online accounting programs that show you your current balance sheet in real time after each entry. The moment you need to prepare a balance sheet for the IRS, it rolls right out.

What do debit and credit mean on the balance sheet?

Do you owe someone an amount of money? Then you call this person a creditor. All creditors go under liabilities because they are short-term debts. All debtors go under assets. Debtors actually owe your company money. The words credit and debit are derived from creditor and debtor. The credit/debit meaning is therefore as follows: a debit is money that is still leaving your company and a credit is money that is still coming in, a credit. Each debit and credit should be reported on your balance sheet.

What is "assets" and "liabilities"?

In the balance sheet section, you will also encounter the concepts of assets and liabilities. The assets are all the assets of your company, the liabilities are the debts and equity.

When we dig deeper into the asset meaning, you can see that a distinction is made between fixed assets and current assets. Fixed assets are those assets that you don't simply resell and that are tied to your business for more than a year. Fixed assets examples are your business premises, machinery and a company car, as well as software. Current assets can and often are converted into cash within a year, such as your inventory, as well as your cash and other cash on the balance sheet.

If we look at the liabilities on a balance sheet, you see that in the liabilities meaning you can also distinguish between fixed liabilities and current liabilities. Fixed liabilities also have a term of more than one year, think of a mortgage loan and reserves. Current liabilities are short-term debts such as outstanding VAT or an outstanding account with a supplier. With everything on the liabilities side of the balance sheet, you can finance everything on the assets side.

Example balance sheet

Now that you know what should be on a balance sheet, we thought it would be good to give an example of what the balance sheet would look like. For our example, we chose a fictitious clothing company called 'StyleHaven'. We prepared the following balance sheet:

Keep in mind that this is a fictitious company and therefore certainly not a benchmark for your business. This is simply an example of what can appear on a balance sheet. Take a good look at your own company to see what needs to be on the balance sheet!