A balance sheet shows your company's financial health by estimating what money would be left over if you liquidated the entire company immediately. To make one you must identify and value your company's assets and liabilities, then compare the two columns to get the "balance." The math is simple; the hard part is correctly valuing your assets in the first place. Maintaining a balance sheet is a part of best practices in business, and you should revise your company's balance sheet annually to keep it current. You can also make a balance sheet for your personal finances at home.
Usable and Salable Assets
Anything your business owns that it can use or sell to make money counts as an asset. This includes office equipment, production equipment, vehicles, real estate, intellectual property, investments, product inventory and even cash. So, if you have a bakery, then your ovens, mixing bowls and flour are all usable assets since you use them to make the goods you sell. For an example of a salable asset, suppose your bakery replaces an oven with an older model. The old oven isn't in service anymore and thus isn't useful, but if it still has value and can be sold for payment, it counts as an asset. Another example of a salable asset is the company's investment portfolio, if you have one. Just remember that assets must be owned. If you rent somebody else's ovens, for instance, then they aren't an asset -- but the money you use to rent them is. Similarly, employees do not count as assets.
Assets on the Balance Sheet
To list an asset's value on your balance sheet, you should usually go with the item's market value as though you were to sell it off by itself. So, instead of just writing "bakery" on the balance sheet, make a line for the ovens, a line for the bowls, a line for the inventory and so forth. Occasionally, you can get a greater value for assets by selling several of them together as a group item, in which case you can list them as such on the balance sheet, but be realistic about this. A balance sheet is no good if it isn't honest. In most cases, you should itemize assets separately -- and when in doubt, find out. Also make sure that, for any assets that are both usable and salable, you only count them once.
Determining the Market Value of Assets
If you have trouble determining an asset's market value, the easiest ways to get help are to look at the going prices for similar items already on the market and to talk to colleagues in your industry who have relevant experience. Another possibility to investigate is that some industries have valuation booklets. If you're selling something such as a used van, you can look up its value in one of these books. You can also try to estimate market value based on what you paid for it minus a reasonable depreciation based on age and wear. As a rule of thumb, err on the side of caution by underestimating the value of your assets when you can't determine precise values.
Liabilities as the Counterpart to Assets
Any money your business owes or will owe, for any reason, counts as a liability. This includes rent, payroll, loans and interest, utilities, accounts payable, other debts, transportation, purchasing, termination fees, insurance and taxes. It also includes the costs of a hypothetical liquidation, including preparing the company's assets for sale, closing everything down and filing all the appropriate paperwork. As with assets, list your liabilities on the balance sheet as individual items, and be honest, realistic and thorough about it. With good financial bookkeeping it should be straightforward for you to account for all of the company's obligations, but if you're concerned about missing some liabilities, this would be a good opportunity for you to audit your accounts.
Financial Health in Terms of Net Worth
Subtract the value of your liabilities from that of your assets, and what remains is your company's net worth. That's the money the owners and shareholders would get if you liquidated the company. Net worth is also known as "shareholder equity," "book value" and "capital." The whole purpose of a balance sheet is to give you a sense of your company's financial health by estimating its worth in this fashion. The sign of a healthy business is a positive net worth that is either stable or growing sustainably.
Josh Fredman is a freelance pen-for-hire and Web developer living in Seattle. He attended the University of Washington, studying engineering, and worked in logistics, health care and newspapers before deciding to go to work for himself.