| | Description | The Balance Sheet, also called the Statement of Financial Position or Assets and Liabilities report, shows your business’s financial position. Why it matters? The Balance Sheet compares your business's assets with its liabilities to show how much money is available to shareholders. It helps you check whether you have enough funds to pay your bills and meet short-term obligations. Investors assess your business performance through the Balance Sheet to decide if they’ll pay dividends or make further investments. Potential buyers review it to evaluate your business’s financial health. You can also use the Balance Sheet to calculate your liquidity ratio. This shows whether you have enough cash, bank funds, or easily convertible assets to pay your bills. Low liquidity can make your business struggle or even stop trading. The Balance Sheet shows: - Total assets- everything your business owns
- Total liabilities- everything your business owes
- Equity- the amount invested by your shareholders
It's called a Balance Sheet because both sides, assets and liabilities plus equity, must match. |
| Resolution | ▼ The balance sheet equation Assets = Liabilities + Equity Your assets equal the total of your liabilities and equity. Put simply, shareholders own any assets not used to pay off liabilities. ▼ Work out whether your short-term assets can cover your liabilities Your liquidity or working capital shows that if you have enough cash, bank funds, or assets you can quickly turn into cash to pay your bills. The formula for working this out is to divide your current assets by your current liabilities.  Greater than one = you can cover your debts.
 Less than one = you could face short-term problems covering your debts.
For example, - Your current assets = £120,000
- Your current liabilities = £60,000
- £120,000 / £60,000 = 2
Your current ratio is 2:1 so you can cover your debts. What's on the report ▼ Assets Assets are the things your business owns, such as: - The amount of money in the bank
- Any high-value items you own such as property or company vehicles
- Money made from sales
You can divide your assets into two main groups. Current assets: These are things you only have for a short time (less than a year) and can sell quickly. Examples include: - Cash or money in the bank
- Money owed to you by your customers. Also known as Trade Debtors, Debtors Control, or Accounts Receivable
- The value of any items you have in Stock, also known as Inventory
Inventories (Products and services) represent the business's raw materials and goods. The exact details of the products and services account will differ. Manufacturing businesses, for instance, will have a large stock of raw materials. Retail businesses buy goods from manufacturers and wholesalers to create their inventory, rather than holding raw materials. Non-current assets: These are things that you own for longer than a year and you can’t sell easily. They are on different sections on the balance sheet. The Balance Sheet records how most non-current assets change in value over time, either depreciating or appreciating. Fixed Assets: These are physical things that your own. Some examples include: - Machinery
- Computers
- Buildings
Intangible assets: These are things that have value but aren’t physical. Some examples include: - Patents
- Copyright
- Trademarks
▼ Liabilities Liabilities refer to the money that your business owes to others. This includes bank loans, your mortgage, money owed to your suppliers and money owed to the government in tax. Liabilities aren’t always a bad thing. They only become a problem when your business consistently spends more than it earns and has no clear and viable strategy to reduce that trend. Current liabilities: These refer to money that you owe and need to pay back in the short term, less than a year. Examples of current liabilities are: - Bank loans and credit cards
- Money you owe your suppliers. Also known as Trade Creditors, Credit Control, or Accounts Payable
- Money you owe the government for tax
Non-current liabilities: These are liabilities that are due for payment more than a year from the date of the balance sheet. Examples of long-term liabilities: ▼ Equity This is the amount of money invested in the business. Equity can consist of: - Profit and loss or Retained Earnings. This is the amount of profit (after tax) reinvested in the business at the end of the financial year and not distributed to shareholders
- Equity - the amount invested by shareholders or the business owner
|
|