Balance sheet

This article provides a brief introduction to balance sheets.

The balance sheet of any business, whether it is a company, a partnership or a sole trader, is simply a statement, or list, of assets and liabilities at a given date.

Typically assets will include such items as:

Cash in the bank.
Money owed to the business in the form of debtors.
Stock.
Tangible assets such as; computers, equipment and furniture.

Liabilities will include such items as:

Net overdraft at the bank.
Money owed to suppliers in the form of trade creditors.
Loans to the business.
Hire purchase contracts.
Money owed to HMRC in the form of VAT or other taxes.
Share capital and accumulated reserves (these are amounts invested or retained in the business by its owners).

And in addition to the obvious items above, accounting practice allows for many other categories to be accounted for, such as:

Prepayments.
Accrued income.
Accruals, etc.

There are timing considerations to be taken into account when listing these items out. The Companies Acts require that liabilities are identified by reference to when they fall due to be paid, so that it can be seen if a business’s immediate payment obligations to creditors exceeds its short-term ability to find the cash to meet those obligations.

It is for this reason that balance sheets of entities who report to Companies House will show 'current assets' and 'current liabilities' and will also show whether current assets exceed current liabilities (good) or whether current liabilities exceed current assets (bad).

In fact, the Companies Acts stipulate the broad formats in which accounts, including the Balance Sheet, must be presented. There are a variety of reporting options depending upon the nature and size of the business in question and guidance is available from Companies House.

Not only is it good business practice to have this information readily available, but it is also information that lenders or statutory bodies will be interested in as the balance sheet is effectively a record of a business’s life since birth; how much profit has been retained in the business over the years and how healthy it now looks. And because balance sheets are published once a year, usually to the same accounting date, it is possible to see a progression year by year in the net asset value of a business.

Not all businesses are legally required to prepare a balance sheet. Unincorporated businesses that do not have to file accounts with Companies House do not need to do so. It is, nonetheless, good practice to ensure that a balance sheet is maintained and is up to date. Many businesses are wound up because they cannot pay their debts when they fall due (effectively this is the definition of insolvency), and this often arises because business owners have lost track of exactly what they owe, particularly to HMRC in the form of VAT, PAYE or Corporation Tax.

In addition to the balance sheet itself, published accounts frequently contain 'Notes to the Balance Sheet' which, to the experienced practitioner, is where much of the essential detail which lies behind the bare numbers can be found.

When considered together with the annual profit and loss account, the balance sheet should provide an accurate snapshot of a business’s well-being at a given point in time.

This article created by:--Martinc 13:12, 30 June 2014 (BST)