What is a balance sheet and what will I find on a balance sheet?

The world of accountancy can be complex. It is advisable to hire an accountant who has the expertise but for SME’s and smaller businesses it can be tricky and costly to outsource this. A balance sheet is one of the basic documents that companies can use to quantify and understand their finances. On accountancy software, it is easy to look at and frequently monitor balance sheets.

This article will give a basic breakdown of a balance sheet and some of the aspects you will find on there. Along with the income statement, statement of cash flows, statement of stakeholders’ equity and the statement of comprehensive income, a balance sheet is one of the main financial documents used by accountants. It represents the state of a company’s finances, identifying assets and pending out payments.

In this article we’ll go through a step by step guide of a balance sheet and have a look at some of the individual components that make up the document; assets, liability and shareholders’ equity.

Assets

The first item is assets. Assets are essentially what the company owns; the accumulated property of a company that have economic value and can be represented in currency. assets are the possessions of a company that they can legally claim ownership on.

Assets can be split into two broad groups; liquid and non-liquid assets. Liquid assets include cash and all the property assets that can be converted to cash.
Non-liquid assets on the other hand cannot be converted into cash quickly, such as buildings and land.

Asset accounts are specifically used to report debit balances. Credit balances can be defined as contra assets. Assets can be further categorised into current and non-current assets. Current asset are the liquid short term assets that can be swiftly liquidated, such as investments, accounts receivable (credit owed) and the inventory; raw materials and products. (both completed and unfinished)

Non-current assets include the non-liquid assets that can’t be quickly liquidated such as property, plant and equipment (PP&E): tangible fixed assets (land and buildings) and the intangible assets such as copyright, patents, goodwill and brand.

Liability

A liability is an obligation or a legal commitment held by a business. Often liabilities can provide economic benefit at a later date.

Liability includes money held the by a business in exchange for a service or order that is yet to be fulfilled. It’s the legal obligation of a business to fulfil a service or send a product in exchange for the initial payment before the money can be classed as a liquid asset.

Liability accounts include; lawsuit payments, income tax payable, wages payable, bonds payable, customer deposit, notes payments, accounts payable, salaries payable, warranty liability and other accrued expenses payable.

Similar to assets, liability accounts have credit balances and contra liability accounts have debit balances.

Liabilities can be classified into two groups, defined by the time period left to fulfil. Current liabilities are due within one year, and long term liabilities are due after a one-year period.

Shareholders Equity

Shareholders (or owners) equity is the financial value of the shareholders. A sole proprietor will report this as owners equity on a balance sheet. This can be worked out by subtracting the liabilities from the assets.

Retained earnings are what remains after paying dividends to the shareholder
Equity is what remains after taking the liabilities off the assets. Shareholders equity is commonly referred to as the book value of the company.

Examples of Shareholders Equity includes common stock, preferred stock, paid-in capital in excess of par value, paid-in capital from treasury stock, retained earnings, accumulated other comprehensive income.

Importance of balance sheets

This article has hopefully provided you with some valuable information about balance sheets. The different aspects that are included all quantify the performance and the actions taken by a business. These must all be taken into consideration when designing, producing and using a balance sheet.

The insights that can be made from a balance sheet are integral to the growth of a business and are used to track ROI (returns on investment). Balance sheets are a clear way of monitoring these, and a comparative approach with old editions can provide excellent control measure on the financial performance of the business.

Find out more about small business accounting costs more broadly and payroll costs specifically. Be sure to take a look at our financial advisor costs page and wealth manager fees pages for more information on how to better manage your finances and the costs involved in the advice.