How We Do Budgeted Balance Sheets
Start with the Basic Accounting Equation
The basic accounting equation is easy. It goes like this: Assets = Liabilities + Owner’s Equity. Understanding it is hard. The equation divides the three main parts of a company, which are also the three main parts of the balance sheet.
Assets are the products and physical objects you own. Liabilities(a.k.a accounts payables) are obligations your company has. Owner’s equity is the money contributed by the shareholders and the earnings sharing.
A budgeted balance sheet revolves around these three terms, which are money amounts that you need to find.
Where to Find the Information Needed for Your Balanced Sheet
You can find all the information you need within your company’s general ledger. The general ledger contains all financial information done within a certain period of time.
Know this, all the assets owned by your company will either be financed by borrowed money (liabilities) or by past earnings and contributions from all owners (owner’s equity).
Example of how a general ledger might look like
Work on the Title of Your Balanced Sheet
Create the title for your balance sheet, title it, “Budgeted Balance Sheet” and beneath the title, add the name of the company(EXCOL in our example, and the date you chose for the balance sheet (June 30th, 2019).
You want to choose a specific day of the year. It’s common practice, to set the date for the end of the quarter or the fiscal year.
Example header of a budgeted balance sheet
List All the Assets Your Company Owns
The goal of your assets is for them to turn into cash before the date listed in the budgeted balance sheet. You’ll want to list them from easiest-hardest to convert into cash.
As mentioned, the most common asset accounts are cash, accounts receivable, inventory, stocks, fixed income, real estate, pre-paid expenses, marketable securities (can be used for stocks and bonds), and others.
The subtotal will be the sum of all your current assets. Call it, “Total Current Assets.”
All current assets have to ideally turn into cash within one year
List Non-Current Assets, A.K.A Long-Term Assets
All non-current assets are assets whose prices go down over time. Think of it like a car, a regular car’s price will always go down as soon as you drive off the lot.
That’s how a non-current asset works, as soon as you start using that asset, the price goes down.
All the non-current assets should be listed in the general ledger as well.
Budgeted Balance Sheet with a list of all current and non-current assets
List All the Non-Tangible Assets
These non-tangible assets have no monetary value and no physical substance but last longer than a year. Non-tangible assets are trademarks, deferred income taxes, copyright, contracts, pre-paid advertisement, and trained employees.
Non-tangible assets are divided into two categories: limited and unlimited life.
The value of the intangible assets will be in the general ledger. Now, make a subtotal and call it, “Total Non-Current Assets.”
Budgeted Balance Sheet with a list of all current, non-current, and non-tangible assets
Add Up All the Assets
Add the totals of both types of assets and label it, “Total Assets.” Here, you want to double-check the amount of the total of your budgeted balance sheet with your general ledger.
If there are any differences, investigate and fix the issue. It’s always best to have more than one person look at the numbers. It doesn’t have to be a professional or someone that’s really good at math, just someone that’s careful and meticulous.
Your total assets amount has to equal the total amount of both current and non-current assets
Determine Your Liabilities
Your liabilities are debts or other obligations (usually monetary obligations) that you plan to pay before the date in the balance sheet.
Some common liabilities accounts are accounts payable, accrued liabilities, accrued wages, customer deposits, deferred revenue, and more.
Add the subtotal and name this section, “Total Current Liabilities.”
Budgeted Balance Sheet with Lists of Liabilities
Include Your Long-Term Liabilities to the List & Add Both Totals
These long-term liabilities take longer than one year to be paid. Long-term liabilities are also known as fixed liabilities. Some long-term liabilities are long-term loans, deferred revenues, bonds payable, and retirement plans.
Add them to make a subtotal and call it, “Total Amount Long-Term Liabilities.”
Once you’re done adding all the current and non-current liabilities, add both totals and write it down as, “Total Liabilities.” This sum will be shown in the owner’s equity part of the balance sheet.
Budgeted Balance Sheet with a List of Long-Term Liabilities
Calculate the Retained Earnings
Retained earnings are the profits your company has earned during a period of time.
It’ll look something like this:
- Retained Earnings = Previous period ending balance + net income – money for investors
Retained earnings won’t go in your balance sheet but it’ll help you calculate the owner’s equity.
How to Calculate Retained Earnings for a Budgeted Balance Sheet
Calculate Owner’s Equity
The owner’s equity has two parts: money invested and retained earnings. Remember that to get the total amount of retained earnings, you add the ending balance of the previous period, add your net income (found on your Income Statement), and subtract the money paid to investors.
Now, list all of the equity accounts owned in your company. Common accounts are treasury stock, preferred stock, common stock, retained earnings, and other accumulated income.
Once you add them all up, label it, “Total Owner’s Equity.”
Budgeted Balance Sheet with Owner’s Equity List
Finish Your Balance Sheet with the Basic Accounting Equation
To finish your balance sheet, you add the total from liabilities and owner’s equity. Title this, “Total Liabilities & Owner’s Equity.”
You’ll know if you did the balance sheet right or not if your “Total Assets” equals the same amount as your “Total Liabilities & Owner’s Equity.”
Remember the equation: Assets = Liabilities + Owner’s Equity
If it didn’t, double-check your work, the retained earnings section is a common problem area.
A budgeted balance sheet revolves around these three terms, which are money amounts that you need to find.