How to prepare a balance sheet

business.gov.au calls a balance sheet a snapshot of where the business stands on one date. Pick the date that ends the period your profit and loss statement covers: a month end, for example, or 30 June, when the Australian financial year finishes.

Prepare the profit and loss statement for the reporting period from books updated to the same date. When assembling equity, also account for earlier profit that has not yet been transferred into an equity account; the latest month's profit alone may not be enough.

Run a trial balance at the balance sheet date and confirm that its debit and credit totals agree. This time you need the accounts the profit and loss statement left out: assets, liabilities and equity.

business.gov.au describes a chart of accounts as the list a business uses to classify its transactions, with each account representing a type such as asset, liability, owner's equity, income or expense. An account set up with the wrong type lands on the wrong statement, so check the type of any account you don't recognise before you start grouping.

A balance sheet figure should rest on more than what the ledger says. For each asset and liability, find a record from outside the books that supports it:

• Bank accounts: a bank reconciliation to the statement at the balance sheet date.
• Credit cards and loans: the card statement, and the lender's statement of the balance owing.
• Petty cash: a count of the cash on hand.
• Accounts receivable: a list of unpaid customer invoices that adds up to the account balance.
• Accounts payable: a list of unpaid supplier bills that adds up to the account balance, checked against supplier statements.
• Inventory: a stocktake. business.gov.au describes stocktaking as a physical count used to check the stock records and the accounts.
• Fixed assets: a list of the assets the business owns, with records of any bought or sold during the period.

At the end of the financial year, business.gov.au suggests reviewing your debtors and creditors, and it counts lists of both among the end-of-year records a business must keep. A list that adds up to the ledger balance is the support for each of those figures.

In this example the loan is the balance that doesn't agree. One possible cause is a repayment recorded entirely as an expense instead of being split between interest and the loan. Find the cause, correct it with your accountant's guidance if needed, and rerun both statements, because the correction changes profit as well as the loan.

business.gov.au's balance sheet template sets out these example groups. They are not an exhaustive list of assets: include any other asset balances the business has, such as intangible assets or long-term investments, in the appropriate section with your accountant's guidance:

1. Current assets: cash, petty cash, inventory and prepaid expenses in the template, along with accounts receivable, which business.gov.au describes as short-term amounts customers still have to pay.
2. Fixed assets: what the business owns for long-term use in its operations, such as land and property, leasehold, vehicles, tools and equipment, and furniture and renovations.
3. Total assets: add every asset balance, including any other non-current assets as well as the current and fixed assets shown in the template.
4. Current liabilities: amounts due within 12 months, such as accrued wages, accounts payable, credit cards and interest payable.
5. Long-term liabilities: loans and other amounts not due for at least a year.
6. Total liabilities, then net assets: total assets less total liabilities.

Sort each liability by when it falls due, not by what kind of debt it is. A loan is often split, with the part payable within 12 months of the balance sheet date shown as current and the remainder as long-term. Check the amounts against the lender's repayment schedule, and ask your accountant if you're unsure. How fixed assets are treated in the accounts is also a question for your accountant.

business.gov.au defines equity as the owners' share of the business: assets less liabilities. The equity section must include the owners' recorded balances and all accumulated profit or loss up to the balance sheet date. Some profit may already sit in retained profits or capital accounts. Include any unclosed balance once, and do not add profit again if the report already includes it.

Which equity accounts you use depends on the business structure. A sole trader's or partnership's books usually track the capital the owners put in and the drawings they take out, while a company's track share capital and retained profits. Money an owner lends to a company is a loan, so it sits with the liabilities rather than in equity. Ask your accountant which accounts fit your arrangement.

The test is that net assets equal total equity. If they don't, something is missing or doubled. Likely causes are a trial balance that didn't balance, an account left out or included on both statements, or a profit figure taken from a different period.

Here net assets and total equity agree, so the statement adds up. That confirms the arithmetic; the outside records behind each balance, from the earlier step, are what show the figures themselves are correct.

Head the balance sheet with the business name and the date it is prepared at. business.gov.au's guidance on its template is to label any estimated figures clearly.

Keep the trial balance, the reconciliations, the stocktake sheets and the lists of debtors and creditors together with the balance sheet. Under the Corporations Act, a company's financial records must explain its financial position as well as its transactions, and they include the working papers behind any adjustments made in preparing the statements. The Act requires a company to keep them for 7 years once the transactions are completed, while business.gov.au says most other business records need keeping for 5 years.

Year-end balance sheets often include adjustments made by your accountant, such as for costs that belong to the year but hadn't been invoiced by its end. Enter the final adjustments in your books too, so the next period starts from the same figures as the finished statements.