How to prepare a balance sheet
The balance sheet (statement of financial position) shows your financial position at a specific moment: what you own, what you owe, and the owner's stake. It rests on one equation that must balance: assets = liabilities + equity. Let's walk step by step from the trial balance to a balanced statement — with a full numeric example.
The accounting equation — the heart of it
Assets
What you own
=Liabilities
What you owe others
+Equity
The owner's stake
Every asset was financed either by a liability (others' money) or by equity (the owner's money) — so the two sides must always be equal.
The preparation steps
- 1
Start from the trial balance (after adjustments)
The balance sheet is built on account balances after adjusting entries — depreciation, accrued and prepaid expenses, and provisions. So step one is a correct, adjusted trial balance.
- 2
Classify each account: asset / liability / equity
Go through every account in the trial balance and decide its type: an asset (yours), a liability (owed), or equity (the owner's stake). Revenues and expenses don't belong here — they're on the income statement.
- 3
Order the assets: current then non-current
Current assets first (cash, bank, receivables, inventory, prepaid expenses) — those that convert to cash within a year. Then non-current assets (fixed assets net of accumulated depreciation, intangibles).
- 4
Order the liabilities: current then non-current
Current liabilities first (suppliers, accrued expenses, taxes payable, the short-term portion of loans) — those due within a year. Then non-current liabilities (long-term loans).
- 5
Compute equity
Capital + retained earnings + the period's net profit (produced by the income statement) − owner's drawings. That's why you prepare the income statement first — its result feeds in here.
- 6
Check that it balances
Total assets must equal total liabilities + equity. If the two sides match, the balance sheet is formally sound. If they don't, there's an error (a missing entry, a misclassification, or a skipped adjustment) you must track down.
A simple balanced example
| Current assets | |
| Cash & bank | 50,000 |
| Receivables | 30,000 |
| Inventory | 40,000 |
| Non-current assets | |
| Fixed assets (net) | 80,000 |
| Total assets | 200,000 |
| Current liabilities | |
| Suppliers | 40,000 |
| Accrued expenses | 10,000 |
| Non-current liabilities | |
| Long-term loan | 50,000 |
| Equity | |
| Capital | 80,000 |
| Retained earnings + profit | 20,000 |
| Total | 200,000 |
Frequently asked questions
Why must the balance sheet balance?
Because every asset was financed one of two ways: with other people's money (a liability) or the owner's money (equity). So the total you own must equal its funding sources. If it doesn't balance, that's not an opinion — it's a recording error.
What's the difference between current and non-current?
The general rule is one year: a current asset converts to cash within a year (inventory, receivables), and a current liability is settled within a year (suppliers). Longer than a year = non-current (fixed assets, long-term loans).
Where does net profit go on the balance sheet?
In equity — inside retained earnings. It comes from the income statement (revenue − expenses) and increases the owner's stake. That's why the income statement is prepared before the balance sheet.
How does Zemam produce the balance sheet?
Automatically from the double-entry ledger, as of any date you pick, IFRS-compliant and self-balancing — with net profit flowing into equity by itself from the actual entries, no manual closing entry. No manual compilation or carry-forward needed.
Related reading
The balance sheet builds itself — and it balances
In Zemam the balance sheet is produced automatically from the ledger as of any date, IFRS-compliant and self-balancing, with net profit flowing to equity by itself — no manual carry-forward or closing entry.
Note: manual preparation requires adjusting entries (depreciation, accruals, provisions, valuing inventory at the lower of cost and NRV) and disclosure judgment. An accounting system posts these from the entries, but the judgment and final disclosure are your accountant's responsibility. Consult them for your company's specifics.