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Balance sheets are a useful part of understanding the financial health of a business, so we explain how they work, why you need them, and what to include on one.
 

What is a balance sheet?

Do I need to a balance sheet for my business?

What should a balance sheet include?

A balance sheet is a type of 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 its 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 that most businesses use, which include:

These financial statements together provide a full picture of your company’s financial position and performance.

Knowing exactly what assets and liabilities your business has is important for a number of reasons. If you are looking for financing then any potential lender or investor will want to see a balance sheet to check the business’s financial position.

The information that your balance sheet shows can help a creditor or investor determine risk, helping them to make an informed decision on whether to grant your request for finance.

There are three main components of a balance sheet:

What are business assets?

An asset is something the business owns, such as cash, equipment or land, unpaid customer invoices and even your branding. Assets are often split into ‘current’ and ‘long-term’ assets when they’re recorded in your business.

What are liabilities?

Liabilities are things that your business is obliged to pay in the future. This could be money you owe to creditors or suppliers, or things like loan repayments and interest, employee salaries, and taxes. Like assets, these will typically be split into either current or long-term liabilities.

What is shareholder equity?

In simple terms, shareholder equity is the value of their share of the business. It’s equivalent to the value of the assets that are left once you subtract all of the liabilities.

Our friendly team at The Accountancy Partnership provide online accountant services. Call the team on 020 3355 4047 and get an instant online quote.

About The Author

Beth-Anne Bruce

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

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