How do you fill out a balance sheet for a business plan?
You can't just fill out a business plan as you need to construct it from the whole set of information that includes the profit and loss account and other items. A layman will not be able to do this properly so seek out a friend who can give you the advice on how to prepare a proper plan. Doing it in an amateur way will not impressed anyone.
How can the balance sheet be balanced if a company takes out a loan?
There are two transactions which need to be recorded:the loanthe accrued interestThe loan. Debit cash and credit loans payable. Assets go up. Liabilities go up. They both go up by the same amount. If the loan will be repaid in less than a year, it is classified as a short-term liability. If not, it is a long-term liability. If portions of the loan are due within one year, you’ll have both.The accrued interest. This is the part that all of the other answers (as of this writing) got wrong or didn’t address very clearly.When you take out a loan, the interest which needs to be repaid are based upon three factors, the principal, rate of interest and the manner in which principal is repaid.If you took out a loan for $1K, then repaid this over 12 month in equal monthly payments, the interest will be different than if you had made no payments and simply repaid the entire amount plus interest at the end of two years.How you will record the $100 in interest, depends upon those factors. If you make no payments and simply owe $1,100 X days, months or years into the future, you can record your interest expense on a straight-line basis. This basically means taking the entire $100 and dividing it by the number of months the loan remains unpaid.In all cases, the journal entry will be the same. Debit interest expense and credit accrued interest. The word accrued means that you owe this amount, just the same as how owe principal.Since interest expense is an income statement account, effectively, this lowers your income which, in turn, lowers your retained earnings (equity section of the balance sheet). So, in terms of the balance sheet, you have a balanced entry which debits equity and credits liabilities.Now, if you are making monthly payments, the straight-line method is no longer appropriate. Because you have decreasing principal and the interest earned by the lender in particular period will be much larger at the beginning of the term, gradually growing smaller and smaller, as the principle amount is reduced by each successive monthly payment. You’ll need to prepare an amortization schedule to determine the monthly interest over the repayment terms to record the proper amount of interest expense each month.
How do I understand a balance sheet?
Two questions:Where has the money come from?Where did the money go?Here is what a Balance Sheet looks like, broadly:Simple, right? Let me show you what the numbers on the balance sheet mean:The total of “sources” and “applications” is equal. Obviously.“Liabilities” is the money that you have borrowed from someone else. If you start a business with the bank’s money, then the bank loan would be a liability.“Equity” is your own money. If you’ve invested in the business yourself, then here is your total amount invested.“Assets” represents all the places where your money is blocked. It could be an electric fan or a machine or even an advance given to your suppliers.Let us see the things that you should look for in a balance sheet.Liabilities vs. equityShould you put your own money in the business or should you borrow? The benefit of borrowing is that you can start a business even if you don’t have money. The bad thing is that you need to pay it back even if you are not earning profit.So which is better?The ideal ratio depends on the business - in some cases, higher is acceptable while in other cases it is not. Anything too high means higher risk, and anything much low means too much own capital.Share capital and net worthWe know that “equity” is the amount belonging to the owners. It has two parts:The amount originally invested by the owners is called “capital”“Reserves” is the profit earned after investment, which belongs to the owners.If a company has huge reserves, it means that it has earned many profits previously and thus can survive losses in the future. See these numbers on the Balance Sheet.Current and non-current liabilitiesWe know that liabilities show the amount borrowed from others which needs to be paid back. The Balance Sheet also shows when it is to be given back. See these two firms -One needs to repay the money tomorrow itself (called current liabilities), the other needs to pay it back after one year (called non-current liabilities). Which is better?If you have many current liabilities, you should ask whether the company has enough cash to repay those liabilities. Where will the cash come from?Current and non-current assetsWe discussed that “assets” are those things where your money is currently blocked. You will get money out of these assets. Just like liabilities, the Balance Sheet also tells you when you will get the money out of your assets.Just like the liabilities:If you purchased a piece of land from the money, then it is non-current asset because you will not get the money back immediately.But if your money is pending with the customer, it is a current asset because the customer can pay it back very soon.Simple, right?Working CapitalNow, just think -Current assets are those which will give you money very soonCurrent liabilities are those which you have to pay very soonTherefore, the equation looks something like this -Now, should we aim for a higher working capital or lower?High working capital means that your cash generation next year will be higherBut lower working capital might mean that you will generate cash this year itselfWorking capital is an important number that is visible from the balance sheet. It helps us to understand how the company will perform over the next one year. If the working capital is negative, it might mean that the company needs to pay more money than it will generate over the next one year.Since working capital is very important, companies show the current assets and current liabilities as a net number on the balance sheet. This is called “net current assets” - as is visible in any balance sheet.Cash and LiquidityCash is a very important figure in the Balance Sheet. It shows how much money you actually have in your hand, right now. A lot of money is blocked in several places - such as land, machinery, or it is kept with your customers etc. - but cash is the money that you have with you right now.Sometimes, you may not have cash but some other current assets which is almost like cash - such as liquid funds. This means that you can convert it into cash whenever you want. For the purpose of a balance sheet, this is also treated as cash.Cash should not be very low, because you might need the money any time. But at the same time, it should not be very high also - because higher cash is useless - it is better to invest it into the business so as to make more money.The trick is to find the right balance.Analysis of the balance sheetNow that you know the meaning of most of the terms, you can understand the business of the company using these tools -Current Ratio - it shows the current assets divided by current liabilities. If the answer is 2, this means that in the next one year, you will receive twice the amount of money that you have to payDebt to equity ratio - it shows how much of the total money in your business is funded by your own pocket and how much is borrowed. If the ratio is 2, this means that you have borrowed twice the money that you have invested yourselfDebtor’s days - it shows how many days your customers take to pay the money back. This number should be as less as possible. It is calculated by dividing your debtors by total salesWorking capital turnover - you get the money and invest it again - that is how business is done, right? The working capital turnover ratio shows how many times you get the money back in a year. It is calculated by dividing the turnover with working capital. This number is also higher the better.There are many such analytical tools that can be applied on a Balance Sheet to understand it better. Some of these tools cannot be applied only on the Balance Sheet, you also need Profit & Loss account with it. Here is a list of many such analytical tools.Maybe it would take another answer to explain the concept of a P&L account. But, till then - I hope you have at least some clarity over what the numbers on the Balance Sheet really mean. Good luck reading and understanding!Footnotes 20 Balance Sheet Ratios to Quickly Determine a Company's Health