Although business transactions are generally important for your startup, the financial or accounting aspect of your business also requires attention.
This is because financial activities enable you to keep track of the efficiency and progress of your startup.
It’s quite crucial for you to know your way around financial statements because estimates will allow you to gauge what your startup will look like once it’s fully operational. The balance sheet of your startup, in particular, is very important since it’s generally required if you’re applying for a startup loan or courting investors.
What is a Balance Sheet?
Before learning how to build the first balance sheet of your startup, it’s important to understand what a balance sheet really is.
A balance sheet is typically divided into two sections. the first section provides the amount of your startup’s assets, whereas the second section provides the amount of liabilities and equity of your startup. In short, the balance sheet represents a general overview of what your business owns, owes to other parties, and the current value of your investment in the business.
However, it’s important to remember that the balance sheet shows the quantitative information of your startup for only a specific period of time. This is generally the same case for other financial statements since relevance and frequency of reporting varies from one company to another.
Why is the Balance Sheet Important?
Apart from using it for courting investors and startup loans, the balance sheet is also an important document to owners. The balance sheet in general serves as a way for an owner to analyze the financial position of his or her startup.
Moreover, the balance sheet can also be used when it comes to uncovering any problems with regards to the activities or transactions happening within a business. A balance sheet is clearly useful and quite important regardless of the nature of your startup.
What Should be Included in My Balance Sheet?
As we’ve already mentioned above, a balance sheet typically includes 3 types of accounts namely, your assets, liabilities, and equity. It’s important to note that there’s usually a wide range of accounts used in a given balance sheet. However, this primarily depends on the kind of startup you have.
Fortunately, it’s not hard to know how you should classify the items used in your business. If you’re having a hard time understanding what to include in your balance sheet, here’s a comprehensive overview of the three main components of a balance sheet.
Assets generally mean everything that a startup owns in a given period of time. Assets are divided into two categories namely, your current and non-current assets. Moreover, they can be tangible or intangible.
Tangible assets refer to items that can be seen or touched such as supplies or inventories, whereas intangible assets often refer to items that don’t have a physical form. A common example for this is the goodwill of your startup.
Much like the assets of your startup, liabilities can also be classified into current and non-current liabilities. Every business or startup need to keep track of their liabilities or debts from time to time since they are quite important to the business itself especially when it comes to financing operations and large expansions.
It’s also important to point out that the current state of your liabilities can also influence the overall reputation of your startup and its capabilities to further borrow from lenders.
Although the accounts or items included in your equity depends on the overall ownership structure of your startup, understanding what to include in it is fairly straightforward.
Equity can also be referred to as shareholder’s equity, and it represents the amount of assets left after paying all liabilities. In other words, it’s the residual ownership present in a business after subtracting all debts from the total assets.
How to Prepare the First Balance Sheet of Your Startup
As an owner of a startup, it’s not necessary to wait for your business to grow before preparing your first balance sheet. In fact, you can start learning the steps you need to build a balance sheet immediately after your startup launches. To help you prepare the first balance sheet of your startup, here are some important things that you need to know about.
Set a Report Date and Period
Timeliness is quite important when it comes to accounting for your business. That’s why your balance sheet should cover a specific period of time. Although some businesses prefer to produce a balance sheet every year or quarter, you can also prepare every six months. Setting a report date and period for your balance sheet is quite crucial.
List Down Your Assets and Liabilities
The next step is to List down what your startup owns and owes. While it’s not completely necessary to do so, listing down your assets and liabilities based on liquidity is also a great idea since it’s a common practice among professionals or accountants.
Determine the Amount of Your Equity
After you’ve list down the value of your assets and liabilities, it’s time to determine the overall value of your startup’s equity. This is much easier compare to the previous step since you only need the total amount of your assets and liabilities in order to compute the total value of your equity. Having said that, knowing the full structure of your equity is an entirely different topic.
Be Careful in Entering the Details
The items of a balance sheet are often categorized into two sides, the debit and credit side. After putting all the necessary entries in place, it’s important to note that it might end up imbalanced in the end. the reason for this is because the data in your balance sheet might be wrong. You can see also AbstractOps for more rich resources.
Mistakes and errors often come from inputting the wrong amount or details. That’s why it’s also important to coordinate with your accountant or bookkeeper when it comes to examining ledgers and past transactions. There are also other reasons that might explain why your balance sheet is not balanced. Here are some of them:
- Incorrect data
- Wrong details
- Wrongly entered calculations
- Mistake in counting inventories
The process of preparing the first balance sheet of your startup is not as complex as you might expected it to be. Although you’d need some basic knowledge in accounting to further improve how your balance sheet should look like, it’s not that hard at all to invest some of your time understanding how the whole process works.
However, if you tend to have a hard time understanding financial statements or learning to prepare for your first balance sheet, it’s always a great idea to seek the help of a financial expert to guide you with your problems. Aside from that, you can also browse the internet for useful programs and more information from experts.