Balance Sheet – A Beginners Guide

Balance Sheet Equation A Balance Sheet is an accounting report required by all companies registered at Companies House and is helpful for self-employed to see the financial health. 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 the Cash Flow Statement. The Balance Sheet shows a company’s assets, liabilities, and shareholders’ equity. It allows you to 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 information that is useful when assessing the financial stability of a company. Financial ratios are used to calculate the business’s financial position; these include liquidity ratios and gearing ratios. Banks and suppliers use them to work out if the 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 allows you to 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. It can be used to see how your business is doing overall and making a profit or loss. The Balance Sheet and Profit and Loss Statement are essential documents for understanding your business’s financial health. You should review these reports regularly to ensure your company is on track financially. Income statement example

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 are assets that can convert into cash within a year. It includes money in the bank, inventory, and accounts receivable (money that is owed to the company). Intangible Assets Intangible assets are things like copyrights, trademarks, and patents. They have value but cannot be touched or seen.

What is Inventory?

Inventory is anything a business owns that it plans to sell. It includes products that are in stock. There are different methods for calculating stock, including first in, first out and last in first out.

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.

Intangible Assets

Intangible assets are things owned by a business that don’t have a physical form. They include trademarks, copyrights, and goodwill. When a company buys an intangible asset, it records the purchase on its balance sheet. The cost of the asset is called the original cost.

What are Liabilities

Liabilities are the money a company owes to others. They can be divided into two categories: current liabilities and long-term liabilities.

Current Liabilities

Current liabilities are liabilities that need to be paid within a year. They include accounts payable, money owed to the bank, and wages owed to employees.

Long-Term Liabilities

Long-term liabilities are liabilities that need to be paid over a period of more than a year. This includes things like money owed on a mortgage or loan, and lease payments.

What is Equity?

Shareholders’ 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 amount of 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, it is easy to print out a balance sheet on any given date. If you are not using software, it is worth looking into as it can save both time and money. Start by taking out a free trial to see if it is suitable. Some of the best packages on offer are Xero, FreshBooks and QuickBooks. Excel is an excellent tool to design your own if you are not using accounting software. Balance Sheet - A Beginners GuideBalance Sheet - A Beginners Guide

Balance Sheet Format

There are examples below, 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. AssetsFixed 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 not suitable for submitting to Companies House but will enable a small business 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.

Formatting a Balance Sheet

Basic Accounting Equation 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 which runs accounting software will have the ability to create the report within the software. We have included a free Excel template if you are running a manual system.

Balance Sheet Example

Below is a sample balance sheet showing each section.
Balance Sheet Example

The Balance Sheet example shows 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 of liabilities; this includes 3,000 from customers and 2,500 in a loan. It is financed by share capital and retained profits from the profit and loss account.

If you want to see more examples, look at the Companies House website. All Limited companies have to submit a Balance Sheet each year and are 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

Equity and debt to equity ratio calculator

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.

There are many different financial ratios that can be calculated from the information in 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 that the company is more reliant on debt to finance its operations. This could be a sign of 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 that the company is in a better position 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 are looking 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 it is required by Companies House, an accountant is the best person to prepare it and submit the accounts.

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 way to do it. The balance sheet is usually prepared by a business owner, bookkeeper, or accountant.

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).