Your balance sheet

This is a list showing what your business owns and owes. It’s usually prepared by your accountant, but it’s also important that you can read a balance sheet and understand what’s in it.

There are three main parts in a balance sheet:

1. Equity – the owners stake in the business (the assets less the liabilities).
2. Assets – what the business owns.
3. Liabilities – what the business owes.

Because the balance sheet is a snapshot, some business owners like to update it during the year so they can keep an eye on trends that can affect their business’s profitability and value. So you may want to do the same.

What is equity?

Equity is made up of the money that owners (or shareholders) put in, plus any money that accumulates from profits the business makes. So when you’re reading a balance sheet there are two main items that show you what your equity is – capital and profits:

1. Capital – this is the money put in by the owners or shareholders. Initial capital may only be say $100, but it increases if more money is put in or new shares are created and sold.
2. Profits – this is the money made by the business over time, which has been retained in the business.

Equity is the difference between what’s owed and owned. If everything the business owns is sold and the proceeds are used to repay the business debts, what’s leftover is the owners or shareholders equity. Your equity increases if you make a profit and decreases if you make a loss.

What are assets?

Assets are everything this business owns. There are two types of assets showing in the balance sheet – current and fixed assets.

1. Current Assets
   Current Assets are essentially things that will be converted to cash within the next 12 months including:
   • money in the bank
   • stock or goods for sales
   • money owed by customers
   • work in progress or things being made but not yet finished and ready for sale.

   They’re temporary and move up and down in value for instance when stock is sold, or money in the bank is used to pay bills. Current Assets may have peaks and troughs in value at times due to seasonal factors such as Christmas.

2. Fixed Assets
   Fixed assets are items like furniture, equipment, plant and machinery, buildings or vehicles your business owns, that will be held for more than a year. The value of these items does not fluctuate with your trading activities but of course it may slowly decrease over time with use and age.

What are liabilities?

Liabilities are anything the business owes. There are two types of liabilities – current and fixed.

1. Current Liabilities
   Current liabilities are related to your business trading activities – the making or proving of your product and service. They include things like money owed to creditors for stock and materials, and any credit, hire purchase or loan payments due to be paid within the next 12 months. Current liabilities should be met from your sales income.
2. Fixed liabilities
   Fixed liabilities are ones that will last for several years such as loans to buy a building, plant or equipment or money lent to shareholders that is not part of your business capital. It’s important the type and length of loan you use matches the expected life of the asset. Long-term liabilities are repaid from business profits.