A balance sheet is a financial statement at a given point in time. It provides a snapshot summary of what a business owns or is owed (its assets) and what it owes (its liabilities) – at a particular date.
The balance sheet shows how the business is being funded and how those funds are being used.
It is used in three ways:
- For reporting purposes as part of a limited company’s annual accounts
- To help you, and other interested parties such as investors, creditors or shareholders, to assess the worth of your business at a given moment
- As a tool to help you analyse and improve the management of your business
- Fixed assets – long-term possessions (vehicles, property)
- Current assets – short-term possessions (stock, cash)
- Current liabilities – what the business owes and must repay in the short term (Bank Overdraft)
- Fixed (long-term) liabilities – including owner’s or shareholders’ capital
The balance sheet is so-called because it always “balances” The total value of the assets, less liabilities, will agree with the “Capital Account”.
Fixed assets include:
- Tangible assets – e.g. buildings, land, machinery, computers, fixtures and fittings – where relevant shown at their depreciated or resale value
- Intangible assets – e.g. goodwill, intellectual property rights (such as patents, trademarks and website domain names) and long-term investments
Current assets are short-term assets whose value can fluctuate from day to day and can include:
- Work in progress
- Money owed by customers
- Cash in hand or at the bank
- Short-term investments
- Pre-payments – e.g. advance rents
Current liabilities are amounts owing and due within one year. These include:
- Money owed to suppliers
- Short-term loans, overdrafts or other finance
- Taxes due within the year – VAT, PAYE (Pay As You Earn) and National Insurance
Long-term liabilities include:
- Creditors due after one year – the amounts due to be repaid in loans or financing after one year, e.g. bank or directors’ loans, finance agreements
- Capital and reserves – share capital and retained profits, after dividends (if your business is a limited company), or proprietors capital invested in business (if you are a sole trader or partnership)
A simple example of a balance sheet can be found in our financial forecasting document which is available to download by clicking here.