Our Accounting FAQs series covers important accountancy terms to help you understand what everything means. This time we’re covering what balance sheets are, why you need them, and what you’ll need to include on one.
What is a balance sheet?
A balance sheet is an important financial statement which shows a business’ assets, liabilities and shareholder equity. It provides a snapshot of exactly what the company owns and owes and shows the company’s financial position at the end of a specific date. You might also hear it referred to as a Statement of Financial Position.
It’s one of the four basic financial statements you’ll need to think about which includes:
Statement of retained earnings (also known as an equity statement, which we explain in more detail below)
These financial statements together provide a full picture of your company’s financial position and performance.
Why do you need a balance sheet?
Knowing exactly what assets and liabilities your business has is important for a number of reasons.
If you are looking for a business loan or investment, they will want to see a balance sheet to check the company’s financial position. The information on a balance sheet can help a creditor or investor determine risk, and make an informed decision on whether to grant finance.
What should a balance sheet include?
There are three main components of a balance sheet – assets, liabilities and equity.
What are assets?
An asset is something the company owns. Examples of assets include cash, temporary investments, accounts receivable, stock, supplies, equipment or land.
This is split into current and long-term assets. Current assets include things like cash or accounts receivable. Long-term assets refer to things that aren’t expected to be converted into cash within a year, such as property or long-term investments. (Though you may well sell the property within a year).
What are liabilities?
Liabilities are the obligations of your business. This could be money you owe to creditors or suppliers. Liabilities include things like accounts payable, loans, salaries, interest, and taxes. These will typically be split into either current or long-term liabilities.
What is shareholder equity?
Shareholder equity is the value of the assets that are left once you subtract all of the liabilities.