There are three main functions of a balance sheet. A balance sheet provides a:
- Summary of the business assets (what it owns) and its liabilities (the things owed to it)
- The ‘net value’ of the business at a specific point in time
- Measure of its ability to pay back what it owes
Assets can be of three types:
- Fixed assets
- Current assets
- Intangible assets
Fixed assets are the items which the business acquires to use over a long period, rather than to resell at a profit. They would normally be kept on until such time as they are worn out, obsolete, or are no longer suitable for the business. Buildings, vehicles, equipment and fixtures and fittings fall into this category.
Current assets account for the items arising in the day to day course of the business. Stocks which convert into debtors (money owed to you) which then become cash are a prime example of current assets.
Intangible assets include such items as trademarks, royalty rights and goodwill, which have no tangible substance but which do add value to a business. They are not identified individually but are used as a balancing figure between the value of an asset if it were sold off as opposed to what its value is when used as part of the business. On the balance sheet they are classed as a fixed asset.
Liabilities are split into current liabilities and long-term liabilities. Current liabilities are those that need to be paid within one year. These will include overdrafts, short-term loans, money owed to suppliers and taxed due within the year such as PAYE, VAT and National Insurance. Examples of long term liabilities would be shareholders’ funds and loans that do not have to be fully paid back within a year.
A balance sheet will typically contain the following figures:
• Fixed assets
• Freehold property
• Leasehold property
• Office equipment
• Plant and machinery
• Other equipment
• Total fixed assets
• Current assets
• Cash in hand
• Cash held in the bank
• Total current assets
• Total assets = total fixed assets + total current assets
• CAPITAL AND LIABILITIES
• Shareholders’ or proprietor’s capital
• Profit and loss
• Total capital
• Medium term liabilities
• Current liabilities
• Tax due
• Total liabilities
• Total capital + total liabilities
The key thing to remember is that the total assets and total liabilities must always balance - which is why it's called a balance sheet!
If you're running a limited company the balance sheet, along with the profit and loss statement, forms part of the annual statutory management accounts required by Companies House. Balance sheets are also required in financial business plans. If you require any assistance in drawing up a balance sheet call us on 020 8952 0140 or send an e-mail to [email protected]