The Balance Sheet
A balance sheet is a statement of fact generally prepared at the end of a financial year. This accounting document summarises assets and liabilities (what a company owns and what it owes) at a point in time. For this reason, you can compare two different balance sheets with relative ease.
The statement also shows the equity in the business in the form of shareholders' funds. This calculation uses the accumulation of profits (or losses) from the profit and loss account while adding in additional share premiums.
It is part of the accounting and bookkeeping set that also includes a P&L and cash flow forecast. Altogether these represent the key financial reports for a company produced on a monthly, quarterly and annual basis.
What Can a Balance Sheet Show You?
The balance sheet presents a snapshot on the health of a business on the date it's constructed. Additional ratio analysis undertaken may also show the gearing of debt and equity.
Other common ratios used may provide further basic information, especially the current assets ratio (or quick assets ratio). The balance sheet must "balance" in that both sides add up to the same amount.
Example Balance Sheet
We've put together an example and format of a balance sheet. It shows the standard headings and the notes for further analysis. The template is the same whether you're a sole trader or limited company. Your accountant can help with any questions you may have or to finalise your statement.
It is always at a date in time showing a snapshot at that date and not cumulative values such as in the profit and loss statement where sales accumulate for the entire period. So, for example, assets are all the assets you have at a given point in time.
Example Balance Sheet Chart
Notes to the Balance Sheet
Here are notes for the above chart
- Note 1: Assets - this row is just a heading for the asset categories below.
- Note 2: Current Assets - these are assets which are the most liquid. This term means that if you needed cash quickly, these could be sold more easily than with fixed assets. Current assets include cash, bank accounts, prepaid expenses, stock, investments, and accounts receivable (debtors account).
- 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 get 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 two 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 items mentioned above.
- 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. i.e., it doesn't have enough money to pay its debts. 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.