How to Prepare a Balance Sheet From a Trial Balance: Step-by-Step With a Full Example
The balance sheet is the statement students most often fail to get to balance. Total assets come out a few thousand dollars away from liabilities plus equity, and with 20 accounts on the page it is hard to see why. Almost every time, the cause is one of a handful of mistakes: using beginning retained earnings, adding a contra account instead of subtracting it, or putting a liability in the wrong section. This guide prepares a classified balance sheet step by step from a real trial balance and shows you how to find the error when it does not balance.
Before You Start: Get Ending Retained Earnings
The balance sheet is always prepared after the income statement and the statement of retained earnings, because it needs the ending retained earnings figure. The retained earnings balance in the adjusted trial balance is the beginning balance — this period's net income and dividends have not been closed into it yet.
We are continuing with Northgate Supply Co., the same company we used in how to prepare an income statement. Its net income for the year was $9,400.
Add: Net income 9,400
Less: Dividends (5,000)
Retained earnings, December 31 23,100
Here is the adjusted trial balance again for reference:
| Account | Debit | Credit |
|---|---|---|
| Cash | 12,400 | |
| Accounts Receivable | 12,000 | |
| Allowance for Doubtful Accounts | 800 | |
| Inventory | 22,000 | |
| Prepaid Insurance | 2,400 | |
| Equipment | 60,000 | |
| Accumulated Depreciation — Equipment | 18,000 | |
| Accounts Payable | 9,600 | |
| Wages Payable | 1,500 | |
| Interest Payable | 400 | |
| Income Taxes Payable | 2,400 | |
| Unearned Revenue | 3,000 | |
| Notes Payable ($4,000 due in 2026) | 20,000 | |
| Common Stock | 30,000 | |
| Retained Earnings (January 1) | 18,700 | |
| Dividends | 5,000 | |
| Sales Revenue | 150,000 | |
| Sales Returns and Allowances | 2,000 | |
| Gain on Sale of Equipment | 1,000 | |
| Cost of Goods Sold | 84,000 | |
| Wages Expense | 28,000 | |
| Rent Expense | 9,600 | |
| Depreciation Expense | 6,000 | |
| Utilities Expense | 3,600 | |
| Advertising Expense | 2,500 | |
| Insurance Expense | 1,200 | |
| Bad Debt Expense | 700 | |
| Interest Expense | 1,600 | |
| Income Tax Expense | 2,400 | |
| Totals | 255,400 | 255,400 |
Step 1: Pick Out the Balance Sheet Accounts
The balance sheet uses permanent accounts: assets, contra-assets, liabilities and equity. Revenues, expenses and dividends have already done their job through net income and retained earnings, so ignore them now. Then sort each permanent account into the classified sections: current assets, property plant and equipment, current liabilities, long-term liabilities, and stockholders' equity.
The heading uses a single date because the balance sheet is a snapshot: "Balance Sheet, December 31, 2025." For a refresher on what each section means, see the balance sheet complete guide.
Step 2: Current Assets
Current assets are cash and assets expected to be converted to cash or used up within one year. List them in order of liquidity — how quickly they become cash.
Accounts receivable 12,000 less allowance (800) 11,200
Inventory 22,000
Prepaid insurance 2,400
Total current assets 48,000
The allowance for doubtful accounts is a contra-asset with a credit balance, so it is subtracted from accounts receivable to show net realisable value. See the allowance method for how that estimate is made.
Step 3: Property, Plant and Equipment
Long-lived assets are shown at cost less accumulated depreciation, which gives their book value (carrying amount).
Total assets = 48,000 + 42,000 = 90,000
Accumulated depreciation is another contra-asset. It is never listed as a liability, even though it carries a credit balance. For how the depreciation was calculated, see depreciation methods explained.
Step 4: Current and Long-Term Liabilities
Current liabilities are obligations due within one year. Long-term liabilities are due later. The tricky item is debt that is paid in instalments: the portion due in the next 12 months is a current liability, and only the remainder is long-term.
+ Income taxes payable 2,400 + Unearned revenue 3,000
+ Current portion of notes payable 4,000 = Total current liabilities 20,900
Notes payable, less current portion (20,000 − 4,000) = Long-term 16,000
Total liabilities = 36,900
Notice unearned revenue is a liability: Northgate has been paid for goods it has not yet delivered, so it owes the customer. Students often list it with revenue by mistake.
Step 5: Stockholders' Equity
Retained earnings (ending) 23,100
Total stockholders' equity 53,100
Total liabilities and equity = 36,900 + 53,100 = 90,000 ✓ equals total assets
The Finished Balance Sheet
| Assets | ||
|---|---|---|
| Cash | 12,400 | |
| Accounts receivable | 12,000 | |
| Less: Allowance for doubtful accounts | (800) | 11,200 |
| Inventory | 22,000 | |
| Prepaid insurance | 2,400 | |
| Total current assets | 48,000 | |
| Equipment | 60,000 | |
| Less: Accumulated depreciation | (18,000) | 42,000 |
| Total assets | 90,000 | |
| Liabilities and Stockholders' Equity | ||
| Accounts payable | 9,600 | |
| Wages payable | 1,500 | |
| Interest payable | 400 | |
| Income taxes payable | 2,400 | |
| Unearned revenue | 3,000 | |
| Current portion of notes payable | 4,000 | |
| Total current liabilities | 20,900 | |
| Notes payable, less current portion | 16,000 | |
| Total liabilities | 36,900 | |
| Common stock | 30,000 | |
| Retained earnings | 23,100 | |
| Total stockholders' equity | 53,100 | |
| Total liabilities and stockholders' equity | 90,000 | |
With the classified format in place, you can calculate the ratios instructors love to ask about. Northgate's current ratio is 48,000 ÷ 20,900 = 2.30, and its debt-to-equity ratio is 36,900 ÷ 53,100 = 0.69. See financial ratio analysis for what those numbers mean.
Balance Sheet Still Won't Balance?
Bring the trial balance to a session with Accounting Tutor Online. A tutor will work through it with you line by line, find where the difference comes from, and show you a checking routine you can use on every exam.
Book a tutoring session →When It Doesn't Balance: A Checklist
- Did you use ending retained earnings? Using the beginning balance leaves you off by net income minus dividends (here, 4,400).
- Did you subtract contra-assets? Adding accumulated depreciation or the allowance instead of subtracting creates a difference of double their amount.
- Did any income statement account sneak in? Revenues, expenses and dividends belong elsewhere.
- Did you split the current portion of debt correctly? Both portions must add back to the full note.
- Is the difference divisible by 9? That often signals a transposition error, such as 4,200 written as 2,400.
- Does your trial balance balance? If the debits and credits do not match, fix that first. See trial balance explained.
Test Yourself: Balance Sheet Preparation
Pick an answer to see the explanation. 4 questions.
Q1. Accounts receivable is $12,000 and the allowance for doubtful accounts is $800. What amount is reported for net accounts receivable?
Q2. A $20,000 note payable requires $4,000 to be paid within the next 12 months. How is it shown?
Q3. Beginning retained earnings are $18,700, net income is $9,400 and dividends are $5,000. What retained earnings figure goes on the balance sheet?
Q4. A company receives cash in advance for goods it will deliver next month. How is this shown on the balance sheet?
Practise Balance Sheets and Classification
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