An introduction to Balance Sheets

You do not need an accounting qualification to be successful in business but understanding accounts will help you understand the basics of financial management accounts and be comfortable using standard financial tools and measures to monitor the performance of your business.

This article covers balance sheets.  The other financial management tools you need to keep a very close eye on are:

• The profit and loss account  
• Your cash flow

A balance sheet, together with a profit and loss account, form part of the annual statutory management accounts documents required by Companies House for Limited companies.

Balance sheet analysis

A balance sheet provides

• a view of your business’ value at a specific point in time
• a summary your business assets (the things it owns) and its liabilities (the things owed to it by others)
• a measure of its ability to pay back what it owes

What information is contained in a balance sheet

A balance sheet is typically split into:

• Fixed assets.  Examples are buildings, land, machinery, computers, as well as intangible assets such as patents, trademarks and website domain names
• Current assets.  Examples are stock, work in progress, debtors and cash
• Current liabilities (things due to be paid within one year).  Examples are money owed to suppliers, short-term loans, overdrafts, taxes due within the year (VAT, PAYE, National Insurance)
• Long term liabilities.  Examples are loans, shareholders’ funds

The important thing to remember is that the total assets and total liabilities (including shareholders equity and the profit or loss from the previous year) must always balance, hence the term balance sheet.

However this is not an exact science as some of the methods of valuation of, for example, intangible assets, stock or work in progress are subject to judgement and interpretation. You should seek advice from a qualified accountant who will be up to date with the latest legislation and good business practice in this area.

Balance sheet example

A balance sheet will usually look something like this:  

Fixed assets (listed by item)	100000
Depreciation (listed by item)	(20000)
Total fixed assets	80000
Current assets	5000
TOTAL ASSETS	85000
Current liabilites (eg bank loan tax)	(90000)
Equity	100000
Profit from previous year	75000
CAPITAL AT YEAR END	85000

 

Where can I get a balance sheet template?

Free downloads of balance sheet example templates are available from the Microsoft Office Online website.

 

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