Both small businesses and large corporations utilise three fundamental financial statements: the income statement, balance sheet, and statement of cash flows. Balance sheets are useful at giving a snapshot of your business’ financial situation at a certain point in time. A balance sheet can help you to assess how successful you have been for the financial year and show the overall the value of the company, so that you can plan accordingly for the future. Allow us to walk you through the different elements involved.
What is a balance sheet?
A balance sheet is calculated using an equation that equates assets with the total liabilities and shareholders’ equity. Let’s break down these three things:
Assets
Current assets – The value of everything that your business owns with a monetary value, which could be converted into cash easily. This includes cash and cash equivalents, accounts receivable (money owed by debtors, yet to be paid back) and inventory, which are the company’s raw materials. Liquid assets are also included, which are cash and cash equivalents already stored in savings accounts.
Non-current assets – These are assets which are not as easily turned into cash and could be converted within or over a year. These could be tangible assets such as equipment, buildings and land, or intangible assets such as patents or copyright.
Liabilities
Current liabilities – This is money owed to creditors in the short-term and must be paid within one year, which will include payments such as rent, taxes, debt repayments and payroll, or other general business costs that will be paid on a regular basis.
Long-term liabilities – These are all the other business debts that are due after one year from when the balance sheet has been produced. This could include long-term loans that are not required to be paid back yet, income tax payments that have been deferred, or pension contributions.
Shareholders’ equity
In simple terms, this is your retained earnings once assets have been added together and both short and long-term liabilities have been taken away. This equates to the net assets of a business that are left over and are available to the owners and shareholders, which is also known as stockholders’ equity. Any revenue generated that exceeds business expenses will usually be placed into a shareholder equity account.
Why is a balance sheet useful?
Once you have put together an accurate balance sheet, this can be useful to your business in calculating your efficiency and giving you an understanding of the financial health of the company. Using financial ratios, such as the debt-to-equity ratio can give you an important insight into financial leverage: your dependency on borrowed funds and capability to pay these back. This can be calculated by dividing total liabilities by the total shareholders and owners’ equity.
Here at Bells Accountants, our comprehensive accounting services can offer you all the assistance you need. We can put together accurate balance sheets that will give you a clear picture of incomings and outgoings, helping you measure business performance. To find out more about our accounting services, give us a call today on 020 8468 1087 or email .
