Balance Sheet

A Balance Sheet is a financial report providing a quick view of a company’s financial condition. It is a summary of assets, liabilities and equity. It is also known as the Statement of Financial Position.
This statement is like a photograph taken at a particular moment in time (a specific date) and provides a picture of the business health on that specific date.

Why is it Called a Balance Sheet?

Everything in bookkeeping and accounting is based on the Accounting Equation. The basic Accounting Equation is as follows:

ASSETS = LIABILITIES + EQUITY

The Balance Sheet is a detailed representation of the Accounting Equation for your small business. Simply, the Balance Sheet Report needs to BALANCE according to the Accounting Equation. 

What Should I Find in the Balance Sheet Report?

There are 3 main section in a Balance Sheet Report, which directly reflect the Accounting Equation:

  • Assets (cash, equipment, property, buildings, inventory, etc)
  • Liabilities (debts owed by the business)
  • Equity (the owner’s financial interest in the business)

Let’s have a look at these categories in more detail.

Assets

Assets are the resources owned by a business. They are the opposite of liabilities, which are what the business owes. Assets are usually divided into 2 main subcategories:

    • Current Assets
    • Non-Current Assets

Current Assets are those assets that can easily be turned into cash within 12 months if the need arises. Current Assets include:

        • accounts receivable (the money clients owe you for goods or services bought on credit. This is also called your debtors)
        • cash in your business bank accounts
        • stock and inventory

Non-Current Assets are those assets that will not be sold anytime soon, and usually last for many years. Non-Current Assets include:

        • buildings
        • property
        • vehicles
        • equipment and machinery

Liabilities

Liabilities are what a business owes. It could be money, goods, or services. They are the opposite of assets, which are what a business owns. Liabilities are also divided into 2 sub categories:

  • Current Liabilities
  • Non-Current Liabilities

Current Liabilities are those liabilities that can be paid off within the next 12 months. Current Liabilities include:

        • accounts payable (the money you owe suppliers for goods and services you bought on credit (also called creditors)
        • short-term loans
        • VAT owed to the government
        • payroll tax owed to the government
        • wages and salaries owed to employees
        •  income tax owed to the government

Non-Current Liabilities are those liabilities that will take a longer time to settle. Non-Current Liabilities include:

        • long-terms loans (eg. an HP loan for the purchase of a vehicle)
        • mortgages on property or buildings

For more on Equity, see further down in this article.

Why is the Balance Sheet Report Important For Me?

The Balance Sheet is a summary of many other reports that are available from your accounting system, or from your accountant. As we said right at the beginning of this article, the Balance Sheet is a SnapShot of your business at a particular moment in time. Here is a list of some of the reports that are summarised in the Balance Sheet:

        • accounts receivable report (debtors)
        • accounts payable report (creditors)
        • bank statement report
        • petty cash report
        • loan account report
        • inventory report
        • Profit and Loss report
        • equity movement report

The Balance Sheet Report will also tell you, the small business owner the following:

 

  • how much cash you have in the business bank accounts
  • how much cash is in the petty cash box
  • the value of any property, buildings, vehicles, machinery, equipment, etc, that the business owns
  • the value of any stock and inventory that your business is waiting to sell
  • the value of any raw materials that the company owns that haven’t yet been turned into products for sale
  • how much clients owe you for purchasing goods and services on credit (debtors book)
  • how much is owed on the company credit cards
  • how much the business owes to suppliers for goods bought on credit (creditors book)
  • how much the business still needs to pay on loans
  • how much the business owes to the government for taxes (VAT, payroll taxes, income tax, etc)
  • how much clients have paid your business in advance for goods and services they haven’t received as yet
  • how much money you have personally put into the business
  • how much money you have taken out of the business for personal expenses

 

Working Capital

You can tell what working capital you have available by completing the following equation:

Working Capital  =  Current Assets  –  Current Liabilities

This is an important measure of the short-term solvency of your business. If a business is unable to meet its short-terms commitments, then it is likely to fail because it has too much debt and too little source of money to pay for the debt. 

More on Equity

Equity is the money an owner would keep if they sold their business. It accounts for any debts they have to repay on the business or its assets.

Equity is calculated based on the Accounting Equation as follows:

If

Assets  =  Liabilities  =  Equity

Then

Equity  =  Assets  –  Liabilities

This final figure is reflected on the Balance Sheet. To see more detail on this, you would look at the Statement of Movements in Equity, which will show how the owner’s financial interest in the business has changed over the year. This statement includes:

    • funds introduced by the owner
    • profit or loss result from the Income Statement
    • funds withdrawn from the business for personal use

 

What is the Difference Between the Balance Sheet and the Profit and Loss Statement?

The purpose of the Balance Sheet differs from the Profit and Loss Statement. The Profit and Loss Statement shows income and expenses for a period of time, whilst the Balance Sheet shows the accumulated values of assets, liabilities and equity at a specific moment in time.

The Balance Sheet values have accumulated since the beginning of the business, and show the financial position of the business as an accumulation of all business activities during that time period.

Balance Sheet Accounts are called Permanent Accounts, because the totals continue to accumulate or build up through the life of a business. Profit and Loss Statement Accounts are called Temporary Accounts, and do not accumulate totals of income and expense accounts past a period of 1 year.

 

How Often Should a Balance Sheet Report be Prepared?

A Monthly Balance Sheet can be prepared by your accountant after bank reconciliations have been completed, so that you can see how the business is currently looking financially.

An  Annual Balance Sheet is always prepared by you accountant after the Profit and Loss Statement has been prepared and completed, and after the necessary accounting adjustments have been made by your accountant.

 

Balance Sheet Example

What follows is a simple Balance Sheet for Doug’s Garden and Landscaping Company. Remember the Profit and Loss Statement we looked at? Below the Balance Sheet Statement you will find some notes that explain what you see in the Statement.

 

 

Notes:

  1. This is the amounts in the business bank accounts as on 29 February 2024
  2. This is the cost value of the inventory that Doug bought over the year but hasn’t sold yet
  3. Doug business owns computer equipment that he uses for design work
  4. Doug’s business bought some machinery on credit
  5. Doug’s business bought a small van for the business
  6. Doug bought some inventory that he hasn’t paid for yet
  7. This is the amount that Doug will have to pay his employees at the end of February 2024
  8. This is the amount of Payroll taxes that Doug will have to pay to the government at the end of February 2024
  9. Doug still owes this amount to the bank for the loan used to purchase the computer equipment
  10. Doug still owes this amount to the company where he bought the machinery from
  11. Doug still owes this amount to the motor vehicle financing company
  12. The Net Assets in Doug’s business are calculated as follows: Net Assets  =  Total Assets  –  Total Liabilities
  13. When Doug started his business, he put this amount of his own money into the business bank account
  14. During the year, Doug spent this amount of company money on personal expenses.
  15. This amount shows the Net Profit that the business has made since it started. This figure includes the 5 655 from the current year, as well as 6 970 Net Profit from previous years. (Remember, the accounts and figures on the Balance Sheet show Accumulated amounts)
  16. Net Equity  =  this amount. It is important to remember that the Net Assets and Total Equity should ALWAYS be the same! (ie. They should ALWAYS BALANCE!!

 

If you are thinking of outsourcing your bookkeeping requirements, check out our Services page to see how we can help you, or contact us today. We will be happy to meet with you to discuss and help plan your future success.

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