How to Prepare a Balance Sheet?

One of the most effective ways to understand a company’s financial position is through a properly prepared and analyzed balance sheet. In this article, we cover key topics, including what a balance sheet is, its types, components, preparation, and analysis.

 

A balance sheet is a financial statement that shows a company’s financial position at a specific date. As an essential tool that presents the current financial status of businesses, the balance sheet also plays a critical role in decision-making and analysis processes. When preparing a balance sheet, the following basic equation must be taken into account:

Total Assets = Total Liabilities + Equity (accounting equation)

 

Balance sheets can be categorized from different perspectives, such as format, analysis purpose, and scope, each serving a different purpose:

 

• Account-type balance sheet (T-shape): Assets are on the left, liabilities on the right.

• Report-type balance sheet (list): Liabilities are listed below assets, in a top-down format.

 

H3: By Analytical Purpose

• Comparative balance sheet: Allows comparison of different periods.

• Analytical balance sheet: Items are presented in detail and a format suitable for analysis.

 

• Company balance sheet: Balance sheet of a particular moment or period.

• Consolidated balance sheet: Combined financial position of the parent company and its subsidiaries.

 

• Commercial balance sheet: Prepared by the Turkish Commercial Code.

• Fiscal balance sheet (tax balance sheet): Prepared in compliance with tax laws.

 

• Static balance sheet: Shows the financial status at a specific date.

• Dynamic balance sheet: Reflects developments over time.

• List balance sheet: Lists assets and liabilities in detail.

• Also: Provisional balance sheet, pro forma, liquidation, bankruptcy, branch, and subsidiary balance sheets are examples of special-purpose types.

 

 

Balance sheet items that detail a company’s assets (active) and liabilities (passive) are fundamental components used in financial analysis, liquidity evaluation, debt ratios, and other financial assessments. According to the generally accepted chart of accounts and regulations in Turkey, the key components are as follows:

 

Current assets: These are assets that can be converted into cash within a short period. Examples include:

• Cash and cash equivalents: Cash on hand, bank balances, checks, other cash equivalents

• Marketable securities: Stocks, bonds, promissory notes, impairment provisions

• Trade receivables: Customers, promissory notes, doubtful receivables provisions

• Other receivables: Receivables from partners, subsidiaries, personnel, and others

• Inventories: Raw materials, semi-finished products, finished goods, merchandise, and impairment provisions

• Prepaid expenses & accrued income: Deferred expenses and accrued income

• Other current assets: Deductible VAT, employee advances, inventory discrepancies, etc.

 

Non-current assets: These are assets that will remain in the business for a period exceeding one year.

• Trade receivables: Promissory notes, discount provisions, etc.

• Other receivables: From shareholders, affiliates, employees, etc.

• Financial fixed assets: Affiliated securities, subsidiaries, impairment provisions

• Tangible fixed assets: Land, buildings, plant-machinery, vehicles, furniture, and accumulated depreciation

• Intangible fixed assets: Goodwill, patents, trademarks, software, etc.

• Financial investments: Long-term receivables, bonds issued by the public or private sectors

• Other non-current assets: Long-term prepaid expenses, real estate investments, etc.

 

 

 

Short-term liabilities: These are debts that are due to be paid within one year.

• Financial liabilities: Short-term bank loans, promissory notes, lease obligations

• Trade payables: Payables to suppliers, trade promissory notes

• Other payables: Employee payables, tax and fund liabilities, advances received

• Accrued expenses, etc.

 

Long-term liabilities: These are debts that are due to be paid within one year or more.

• Financial liabilities: Long-term bank loans, bonds, finance leases

• Trade payables: Certificates and promissory notes

• Other long-term liabilities: Payables to employees, tax authorities, etc.

 

Equity: Reflects shareholders’ investments and retained earnings.

• Paid-in capital

• Capital adjustment differences (due to inflation)

• Reserves: Profit reserves, legal and contingency reserves

• Retained earnings / accumulated losses

• Current period net profit/loss

• Revaluation surplus, etc.

 

 

The balance sheet process is a crucial step in evaluating a company’s financial health and making informed financial decisions. In this systematically managed process, the first step is determining the reporting date for which the balance sheet will be prepared. Then, all assets are identified in detail and classified as either current (short-term) or non-current (long-term). After classifying assets, the company determines its debts, including both short-term and long-term liabilities. Next, equity items such as paid-in capital, reserves, and the period’s profit or loss are calculated. Following these calculations, an inventory count is conducted to verify the physical presence of stock and assets, and any discrepancies with the records are corrected. After gathering all this information, the balance sheet table is prepared by placing asset items on one side and liability and equity items on the other. The final balance sheet must ensure the equation “Assets = Liabilities + Equity” is satisfied. If necessary, the document is audited and corrected before being reported in the desired format and presented.

 

 

 

Balance sheet analysis is a comprehensive process used to assess a company’s financial health. The analysis typically begins with horizontal analysis to examine changes across periods, followed by vertical analysis to evaluate the percentage share of each item in the total balance. Ratio analysis is then conducted to calculate key performance indicators, including liquidity, debt, profitability, and efficiency. Structural analysis involves examining the balance between equity and debt, as well as long-term trends in financial sustainability. Finally, comparative analysis with industry averages and competitors provides contextual understanding. This multi-layered approach reveals a company’s strengths and weaknesses, offering a solid foundation for strategic decision-making.

 

 

Sources: 1.