Understanding your balance sheet

If you want to understand the financial situation of your business at a given point in time, you will need to examine the balance sheet (sometimes called the statement of financial position). This a statement of the assets, liabilities and capital of a business detailing the balance of income and expenditure over the preceding period. Together with the Profit and Loss statement, it provides a complete picture of the financial position of a business.

It may sound obvious, but the balance sheet should always balance! The equation, Asset value = liabilities + equities is used to ensure that this happens, and it is worth remembering that although this gives a snapshot of a particular moment in time, it will not give a sense of trends over a longer period.

What are ‘assets’?
Assets are things the company owns that have a current or future value. On the balance sheet, assets may be subdivided into bank accounts, current assets, fixed assets, inventory, non-current assets, intangible assets and prepayments. These assets can all be translated into currency.

What are ‘liabilities’?
Liabilities are the amounts that are owed to both suppliers and creditors for goods or services that have already been received. They may also include any amounts received in advance for services that are yet to be provided by the business. Generally, liabilities will be sub-divided into ‘current’ (payable within a year), and ‘non-current’ liabilities.

Liabilities will include accounts payable, payroll obligations, interest, warranties, loans and customer deposits received.

What is ‘equity’?
Equity includes owner funds contributed, drawings, retained earnings and stocks, and the value of the equity is calculated by deducting the liabilities from the assets. It is worth remembering that the balance sheet equity is not necessarily the market value of the business as assets could be worth more or less in value.

Although the balance sheet is an invaluable piece of information, it does have some drawbacks, notably that it only gives you a snapshot of a particular point in time. Additional data will need to be used to gain a more complete picture of the financial situation of a business.

For Ben Case, owner of decimal+ accountants in Newmarket, balance sheets can provide businesses with a useful insight to their financial situation, but they do need to be completed accurately to get an honest picture. “The balance sheet is an essential tool to help you understand the current financial health of your business and it allows you to get a quick view of the assets and liabilities of your company,” says Ben. “It will help you answer important questions, such as whether your company has a positive net worth, whether there is enough cash and assets to cover any obligations and how your business is performing in comparison to its peers. Filling in the balance sheet on a regular basis can be time consuming, but it is something accountant such as us will be happy to do for you.”

Decimal+ are accountants in Newmarket and Cambridge. If you have any questions about completing your balance sheet, why not contact us for an initial discussion? We’d be happy to help.