Understanding Your Companies Balance Sheet
December 3, 2021
The Local Solicitor team are firm believers that to understand the financial position of a business at a specific point of time, you look at the balance sheet. The balance sheet may also be called the statement of financial position. Together with the Profit and Loss Statement, and possibly other reports such as the Statement of Cash-flow, these reports provide a complete understanding of the financial position and business performance.
So what’s involved? The balance sheet has three sections: assets, liabilities and equity. This guide from the Local Solicitor team will help you understand your companies balance sheet.
What are Assets?
Assets are things and resources that a company owns. They have current and/or future value and can be measured in currency.
Assets may be subdivided on the balance sheet into bank accounts, current assets, (receivable within one year), fixed assets, inventory, non-current (or long term) assets, intangible assets and prepayments.
What are Liabilities?
Liabilities are amounts owed to suppliers and other creditors for goods or services already received. Liabilities may also include amounts received in advance for future services yet to be provided by the business.
Liabilities are generally subdivided into current, (payable within one year), and non-current liabilities.
What is Equity?
Equity includes owner funds contributed, drawings, retained earnings and stocks. The value of the equity equals assets minus liabilities.
Transactions that affect profit and loss accounts also affect balance sheet accounts. For example, providing a service increases the accounts receivable balance, which therefore increases the equity.
The Balance Sheet Equation
The balance sheet must always balance! Asset value = liabilities + equity.
The balance sheet equation shows you how much money you would have leftover if you paid all your bills and debts and sold all your assets on a given date. This amount is the Owner’s Equity.