Many people panic when faced with balance sheets usually because they don’t understand them ...
Many people panic when faced with a balance sheet, usually because they don’t understand them. In a nutshell, a balance sheet is a snapshot of a company on a given day. That doesn’t sound like much, however, if you look carefully at it, it's going to tell you a lot about the financial health of a business.
It is a list of a company’s assets and liabilities that must balance (hence the name) with the money employed in the business including the profits or losses that the company has made up to that particular day. The Assets appear on one side, all those items that generate income, such as:
- money in the bank
- fixed assets
- prepayments - bills you have paid in advance
- intellectual property rights
- petty cash
The other side are those items that cost money, the Liabilities:
- VAT and any other sums owed to HMRC
- bank overdraft
- credit card balances
- accruals - bills that you know that you will have to pay
The total assets are taken from the total liabilities, giving either a plus or minus figure, described as the net assets (if positive) or net liabilities (if negative).
There is then another list that shows the money the business requires to function, the total capital employed. It’s made up of:
- share capital - the money put into the company to start it up in the first place
- long term loans - any loans taken out to build the business
- all the previous year’s profit or loss
The total of this list must equal the net asset/ liability figure, whatever it may be. The balancing figure is the profit/ loss figure, being the total amount of profit or loss made by the company since it was formed.
Now you have a balance sheet!
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