Balance Sheet – A Beginner Guide with Examples
A Balance Sheet is an accounting report required by all companies registered at Companies House and is helpful for self-employed to see their financial health.
The Balance Sheet Explained
The Balance Sheet is one of the three financial statements businesses use to measure their financial performance. The other two are the Profit and Loss Statement and Cash Flow Statement. The Balance Sheet shows a company’s assets, liabilities, and shareholders’ equity.
It lets you see a snapshot of your business on a given date, typically month or year-end. It is also a valuable tool for management to know the value of assets a business owns, including equipment, bank balance and what it owes at any given time. We have included a balance sheet example and details.
The report provides helpful information when assessing a company’s financial stability. Financial ratios are used to calculate the business’s financial position, including liquidity and gearing ratios. Banks and suppliers use them to determine if they can offer a loan, overdraft or credit facility.
What are the Three Financial Statements?
The three financial statements are the Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement.
Balance Sheet
The Company’s Balance Sheet is an accounting report that shows a company’s assets, liabilities, and shareholders’ equity. It lets you see a snapshot of your business on a given date, typically month or year-end.
Profit and Loss Statement (Income Statement)
The Profit and Loss Statement or Income Statement shows a company’s income and expenses over a specific period, such as a month or year. The P&L can be used to see how your business is doing and making a profit or loss.
The Balance Sheet and Profit and Loss Statement are essential reports for understanding your business’s financial health. You should review these reports regularly to ensure your company is financially stable.
Cash Flow Statement
The cash flow statement is another important financial statement that shows a company’s cash inflows and outflows over a specific period. You can use this report to see how your business is doing overall and whether it has enough cash to cover its expenses.
What is Included in the Balance Sheet?
Balance Sheets include assets, liabilities, and shareholders’ equity. Assets are everything that a business owns and can use to pay its debts. Liabilities are the money a company owes to others. Shareholders’ equity is the difference between a company’s assets and liabilities. It shows how much of the company belongs to its shareholders.
What are Assets?
Assets can be split into three sections – current assets, fixed assets, and intangible assets.
Current Assets
Current assets refer to assets that a company can easily convert into cash within a financial year. This category includes readily available funds in the bank, inventory stock, and accounts receivable, which is money owed to the company by its customers. These assets are crucial for ensuring a company’s liquidity and its ability to meet short-term obligations.
What is Inventory Stock?
Inventory stock includes all items a business possesses with the intention of selling, including products currently in stock. Various techniques, such as the first in, first out (FIFO) and last in, first out (LIFO) methods, are used for calculating stock levels.
Fixed Assets
Fixed assets or long-term assets are things a business owns that it plans to use for a long period of time. This includes land, buildings, equipment, and vehicles.
When a company buys a fixed asset, it records the purchase on its balance sheet. The cost of the asset is called the original cost. The company then begins to depreciate ( or reduce in value) the asset over time.
As a small business, it’s crucial to maintain a fixed asset register. This register serves as a comprehensive record, detailing all the information about each asset owned by your business. Not only does it help in tracking the value and condition of your assets over time, but it also plays a vital role in financial management, ensuring accurate depreciation calculations.
Intangible Assets
Intangible assets refer to non-physical resources possessed by a business. These encompass trademarks, copyrights, and goodwill.
When a company acquires an intangible asset, such as patents, trademarks, or copyrights, it must accurately record the transaction on its balance sheet. The purchase price paid for the intangible asset is known as the original cost. This figure is crucial for accounting purposes, as it serves as the basis for calculating depreciation or amortisation expenses over the asset’s useful life, thereby impacting the company’s financial statements and tax liabilities.
What are Liabilities
Liabilities represent financial obligations a company must fulfil in the future, including loans and lease payments. These obligations are classified as either current liabilities, due within the forthcoming year, or long-term liabilities, due beyond a year.
Current Liabilities
Current liabilities refer to debts or financial obligations that must be settled within a year. Many businesses manage a variety of these liabilities, including accounts payable, deferred revenue, taxes payable, and salaries payable. Vigilant monitoring of your current liabilities is crucial, as excessive debt can pose a significant financial risk to your business.
Long-Term Liabilities
Long-term liabilities need to be paid over more than a year. This includes money owed on a mortgage or loan and lease payments.
Directors Loan Account: Understanding the Basics
The Directors Loan Account (DLA) tracks all financial transactions between a director and the company. It records any money borrowed or loaned by the director to the business, as well as any personal expenses paid for by the company on behalf of the director. It can be an asset or a liability, depending on whether the business owes or is owed the money.
What is Equity?
Shareholder equity or Owner’s equity is the difference between a company’s assets and liabilities. It shows how much of the company belongs to its shareholders.
When a company makes a profit, the amount of profit is added to shareholders’ equity. When a company loses money, the loss is subtracted from shareholders’ equity.
How do you calculate shareholders’ equity?
Shareholders’ equity is calculated by subtracting a company’s liabilities from its assets. This shows how much of the company belongs to its shareholders or owners.
How to prepare a Monthly Balance Sheet
All accounting software packages will include the Balance Sheet in their reporting section. Therefore, printing out a balance sheet on any given date is easy.
It is worth looking into if you are not already using software, as it can save time and money. Start by taking out a free trial to see if it is suitable. Some of the best packages on offer are QuickBooks and Xero.
Excel is an excellent tool to design your own if you are not using accounting software.
Balance Sheet Format
Below, we show the balance sheet layout examples, but it shows the following information:
Balance Sheet Heading
The heading includes the business name and date. The format of the date is: as at date. An example might show ABC Computers – Balance Sheet as at 30th June 2021.
Assets – Fixed Assets, Current Assets, intangible assets, stock, cash, money owed from customers (accounts receivable ledger) and prepayments.
Liabilities – Debts, accounts payable, taxation, pensions and accruals.
Equity – Shares and retained earnings from the Profit and Loss account.
Balance Sheet Template
We have a free Excel Template for you to download. It is unsuitable for submitting to Companies House but will enable small businesses to produce a report for their year-end. If you are a limited company, you will need your accountant to format the report as part of your accounts to submit to Companies House. This ensures that the financial report adheres to the generally accepted accounting principles.
Formatting a Balance Sheet
Below is the balance sheet formula.
The report is formatted vertically, showing the following:
Owners Equity = Assets – Liabilities
The two sides of the accounting equation must always balance.
Below is a typical balance sheet example; each link provides further details and how to account for them.
| Assets | ||
| Fixed Assets | 1000 | |
| Accumulated Depreciation | 100 | |
| Total Fixed Assets | 900 | |
| Current Assets | ||
| Stock | 250 | |
| Debtors | 150 | |
| Bank | 1250 | |
| Total Current Assets | 1650 | |
| Total Assets | 2550 | |
| Liabilities | ||
| Creditors | 300 | |
| Loan | 200 | |
| Credit card | 75 | |
| Total Liabilities | 575 | |
| Net Assets | 1975 | |
| Equity | ||
| Capital | 200 | |
| Retained Profit | 1775 | |
| Total Equity | 1975 |
Using the sample above, we can look at some transactions that may change only the balance sheet figures.
The business purchases a new computer for 400.00 from the bank account. The transaction will increase the fixed assets by 400.00 and reduce the bank by 400.00
Another example is the business pays 125.00 to the creditors. The double entry will reduce the bank by 125.00 and reduce the creditors by 125.00.
The sample would then look like this:
| Assets | ||
| Fixed Assets | 1400 | |
| Accumulated Depreciation | 100 | |
| Total Fixed Assets | 1300 | |
| Current Assets | ||
| Stock | 250 | |
| Debtors | 150 | |
| Bank | 725 | |
| Total Current Assets | 1125 | |
| Total Assets | 2425 | |
| Liabilities | ||
| Creditors | 175 | |
| Loan | 200 | |
| Credit card | 75 | |
| Total Liabilities | 450 | |
| Net Assets | 1975 | |
| Equity | ||
| Capital | 200 | |
| Retained Profit | 1775 | |
| Total Equity | 1975 |
Any business that runs accounting software will have the ability to create reports within the software. We have included a free Excel template for running a manual system.
Simple Balance Sheet Example
Below is a sample balance sheet showing each section.
How to Read a Balance Sheet
The balance sheet is organised into distinct sections, each displaying the total of corresponding accounts along with their respective sub-accounts and balances. This structured layout enhances readability and provides a clear overview of the totals for each account.
Using the balance sheet example above, we can see the following information.
The company owns 18,500 in Assets. The assets are made up of fixed and intangible assets, bank, stock and debtors.
The company is owed 5,500 in liabilities; this includes 3,000 from customers and 2,500 in a loan. It is financed by share capital and retained earnings from the profit and loss account.
If you want to see more examples of balance sheets, look at the Companies House website. All Limited companies must submit a Balance Sheet each year, which is available to view. Most small companies will submit abbreviated accounts. For larger companies, they may even have the report on their website.
Financial Ratios and the Balance Sheet
A balance sheet can be used to calculate several financial ratios. The most common is the debt-to-equity ratio.
Calculating financial ratios is essential for two main reasons.
The first reason is to see how well a company is doing by comparing their results from one year to the next.
The second reason is to compare the company against others in the same industry. It will give you an idea of how efficient the company is and whether they are making a profit.
Many different financial ratios can be calculated from the information on a balance sheet. We will look at two of the most common below.
Debt to Equity Ratio
The ratio is calculated by dividing the total liabilities by the total equity.
This gives you a percentage showing how much the company is financed by debt.
A higher debt-to-equity ratio means the company relies more on debt to finance its operations. This could signify financial trouble if the debt is not being paid back.
Current Ratio
The current ratio is calculated by dividing the total current assets by the total current liabilities.
This shows how easily a company can pay its short-term debts. A higher number means the company is better positioned to do this.
What is a Balance Sheet Used for?
The report is a financial snapshot of the business. It shows in one place how much the business owns (assets) and owes (liabilities). The report is used by business owners, investors, creditors and shareholders.
How do you Prepare a Balance Sheet?
A balance sheet can be prepared in several ways. The easiest way to prepare a balance sheet is to use an accounting software package, which will automatically produce the report from the reports list. We have a free template download if you want to produce one using a spreadsheet.
Who Prepares the Balance Sheet?
The balance sheet is prepared by either a business owner, bookkeeper or accountant. If Companies House requires it, an accountant is the best person to prepare and submit the accounts, as they will know the generally accepted accounting principles.
Balance Sheets Conclusion
A balance sheet is one of the financial statements of a business that shows its financial position. The report can be used by business owners, investors, creditors, and shareholders. A business can prepare the balance sheet in several ways, but accounting software is the easiest. A business owner, bookkeeper, or accountant usually prepares the balance sheet.
The balance sheet is split into three sections: Assets, Liabilities and Equity. The Assets section lists all the items that the company owns. The Liabilities section lists all the money that the company owes. The Equity section shows how the company is financed (e.g. by share capital and retained profits).
