A balance sheet is generally prepared at the end of a financial year and summaries assets and liabilities (what a company owns and what it owes) at a point in time and can be compared to the previous period.
The statement also shows the equity in the business in the form of shareholders funds which is basically the accumulation of profits (or losses) from the profit and loss account.
It is part of the accounting and bookkeeping set that also includes a P&L and cash flow forecast and will be included in financial reports sometimes with ratios.
The balance sheet shows the health of a business at the date it's constructed and any ratio analysis undertaken will show gearing of debt and equity and other ratios can be used such as current assets ratio (or quick assets). The balance sheet must "balance" in that both sides add up to the same amount.
Example Balance Sheet
Here's an example and format of a balance sheet that shows the standard headings and the notes for further analysis. The template is the same whether you are a sole trader or limited company and any questions should be put to your accountant. It is always at a date in time showing a snap shot at that date and not a cumulative value such as in the profit and loss statement where sales are added for the period. So for example assets are all the assets you have at a point in time.
|5:||Short Term Liabilities||5,000|
|6:||Long Term Liabilities||3,000|
Notes to the Balance Sheet
Here are notes for the above P&L
- Note 1: Assets - this is just a heading for the asset categories below
- Note 2: Current Assets - these are assets which are the most liquid in that if you needed cash quickly these can be sold more easily than with fixed assets. Current assets including cash, bank accounts, prepaid expenses, stock, investments, accounts receivable (debtors account) and other current assets
- Note 3: Fixed Assets are those that are less liquid and will include vehicles, property, plant, equipment, goodwill, intangible fixed assets and other investments. These are shown net of any depreciation you have added into the P&L on a cumulative basis
- Note 4: Total Assets - is simply the sum of the 2 items above
- Note 5: Short Term Liabilities - are those items your business owes that fall due within one year and include accounts payable (creditors), income tax, VAT payments, corporation tax, bank loans, other loans and other short term liabilities
- Note 6: Long term liabilities - are those amounts your business owes falling due after one year and may include some of the above mentioned items.
- Note 7: Total Liabilities - is simply the short and long term liabilities added together
- Note 8: Working capital is the net amount of assets minus liabilities - if this figure is negative then technically the company is insolvent - ie: it doesn't have enough to pay all of its liabilities and in some countries it's illegal to trade in this situation
- Note 9: Shareholders funds or equity - includes all the profits or losses made to date by the company (called retained earnings), any monies received for equity stakes in the business, minority interests, revaluation reserve and capital reserves.