The balance sheet – a snapshot of your business finances
One of our jobs as financial directors is to train business owners and managers on the fundamental foundations of finance. By understanding the 3 different core statements/reports that make up a set of accounts – and the jargon that goes with them – you’ll become much more confident in your ability to translate the figures, and realise that accounts aren’t really quite as complex as they can first appear.
Over this next series of posts, we’ll explore the language you’ll come across in your accounting processes and the 3 key documents your finance department or accountant will put together for you to keep you updated on your position and prepare for annual filing.
The balance sheet is one of the 3 different statements/reports that make up your set of accounts; it’s called a balance sheet because it will always balance – if it doesn’t, then you need to do your calculations again!
Your balance sheet shows you:
What your business owns (assets, stock etc)
What your business owes (liabilities e.g. accruals, outstanding bills, tax, loans etc)
Where the money has come from (share capital, debt capital, retained profit)
Essentially, as an ongoing process, it shows you the funding position of the business at that specific moment, and how that money has been used.
If you hear someone talk about a statement of financial position, it means exactly the same thing, it’s just a different name. Double entry bookkeeping can help to ensure your balance sheet is accurate, because each transaction in a set of accounts has an equal and opposite side.
For example, if you make a sale but the invoice hasn’t been paid, you’d credit your sales revenue with that amount and debit your debtors - the money you’re owed by your customers - with the same amount. Then, when the money comes in from the customer and the invoice is paid, you credit the debtors to wipe out the debt, and debit the bank account – so it’s the same amount of money, from the same transaction, but it’s positioned in two different places in your accounts.
Setting out a balance sheet
The document will open with the following text at the top: “This is the statement of financial position for [company name], as at [date]”.
The date will always be the last day of your accounting period. That’s why we call it a snapshot, or still photograph, of your funding position – because it would probably be different the next day, due to the constant movement of funds in and out of a business.
The balance sheet comprises of a top half and a bottom half, and it’s these two elements that need to balance.
The top half
The top half of the balance sheet will be organised in this order:
Fixed assets (what you’ve paid, less any depreciation you’ve taken off)
Long term liabilities (e.g. debt borrowing)
Net assets position e.g. Fixed assets + current assets - current liabilities
The bottom half
Underneath, in the bottom half, you show:
Money you have from share capital/owners funds/retained funds (your equity)
If you look at your current assets and your current liabilities, this shows you your working capital cycle – how much money you have coming in and how much you need to run your business on an ongoing basis.
Essentially the balance sheet shows where the money in your business came from and how it’s being used.
There are lots of finer points regarding your balance sheet, such as working out liabilities and depreciation, so if you need further support or training , please feel free to contact us for a no-obligation chat about how we can help.