What Does It Tell You?
A balance sheet is one of the main financial reports used to understand a business. It provides a snapshot of what the business owns, what it owes and its overall financial position on a particular date.
Unlike a profit and loss statement, which measures income and expenses over a period, a balance sheet shows the position at one specific point in time.
What does a balance sheet include?
A balance sheet is divided into three main areas:
Assets
Assets are items the business owns or controls. Fixed assets are normally held for longer-term use and can include property, equipment, machinery and vehicles.
Current assets are expected to be converted into cash or used within 12 months. These may include:
- Money in the bank
- Amounts owed by customers
- Stock
- Prepayments
Accurate bookkeeping is important because missing or incorrectly recorded transactions can make the balance sheet unreliable.
Liabilities
Liabilities are amounts the business owes. Current liabilities are normally payable within 12 months and may include supplier invoices, VAT, PAYE, Corporation Tax and short-term borrowing.
Long-term liabilities, such as some loans and finance agreements, are due after more than 12 months. The balance sheet may divide a loan between the amount repayable within the next year and the remaining longer-term balance.
Capital and reserves
Capital and reserves represent the value remaining after liabilities are deducted from assets. For a limited company, this section usually includes share capital and retained profits or losses.
The basic calculation is:
Assets – liabilities = capital and reserves
Why is a balance sheet important?
A balance sheet can help you assess whether the business can pay its short-term bills, how much it owes and whether its financial position is improving.
A profitable business can still experience cash problems if customers have not paid or too much money is held in stock. This is why the balance sheet should be considered alongside profitability and cash flow.
Comparing balance sheets over several months or years can highlight increasing debt, slow-paying customers or falling cash balances. Regular management accounts can provide this information during the year rather than waiting for the annual accounts.
GMS Accountants helps limited companies in Cambridge and Nottingham understand their accounts and use the figures to make informed decisions. If you need help interpreting your balance sheet, please get in touch.
