A balance sheet is a report that shows a business’s asset, liabilities, and equity at a particular point in time. It provides a snapshot of what assets the company owns, how much money it owes to third parties and the approximate net worth of the business. You prepare the balance sheet using the information from the trial balance.
You start off by listing all your asset accounts first. Thereafter, you will list all your equity and liability accounts. You must make sure that the totals balance. Once your trial balance is properly balanced, you will copy the appropriate asset, equity or liability number from the trial balance and paste it into the balance sheet.
[Click Here to refer to the Trial Balance article for the numbers]
As you can see, each number has been copied from the trial balance. Only the retained earnings number is calculated. The retained earnings is simply the sum of all the corporation's profits and losses in each financial year. Since this is the first month of business, the retained earnings = net profit as disclosed in the income statement.
From analyzing the above balance sheet of Tom's business, we can conclude that after the first month of business, the company is in a strong solvent position. It has more assets [$31 500] than liabilities [$7 800]. This is a good thing because it means that if the corporation was forced to pay off all of its debts owed to third-party lenders, the corporation would have enough assets to do so.
A business should never be in a negative equity position. This means that your business is technically insolvent. In other words, the money borrowed by the business exceeds the value of the assets owned by the business. This is never a good thing. As a business owner, you always want to aim to have a positive total equity number.
Tom Inc's total equity = $23 700. It is a positive number which is a good thing. This indicates what the minimum value of the business is equal to and how much belongs to the business owner if the corporation was to be liquidated.
