The Travelogue Continues ...
The Balance Sheet Is the Destination
Posted by Maureen Windridge on 15/03/2012
This week, we're going to continue along the route of a series of accounts being akin to the travelogue of the journey a business takes; as I discussed in a previous blog post, the Profit & Loss account relates the journey; let's move now to the Balance Sheet, which describes the latest destination ...
the balance sheet describes the destination in the travelogue of your business
The Balance Sheet is a statement of the Assets & Liabilities of the business and a statement of how the business has been financed. It tells you what the current value of the business is.
The statement of Assets & Liabilities is split into 4 main sections:
- Fixed Assets: These are items that will be useful to the business for more than one financial year. They are also things that have quite a high value. i.e. one could say that a stapler may last for 3 or 4 years however it is not normal to put an item of low cost into Fixed Assets. Fixed Assets are subdivided into Intangible and Tangible Fixed Assets. Intangible Fixed Assets include good will, trademarks, patents and copyrights. Tangible Fixed Assets are those that can be seen and touched. The value of Fixed Assets in the Balance Sheet is usually the net book value. That is the price paid for the asset less the depreciation to date (remember last week I explained that depreciation is the way we account, in the Profit and Loss account, for the cost of the asset over the useful life of that asset).
- Current Assets: These are items that have a value to the business and are usually convertible to cash in a short period of time. The obvious ones are cash and money in the bank. Others are:
Debtors - money owed to the business
Prepayments - items paid for in advance, ie annual insurance premiums that overlap two accounting periods
Tax or VAT refunds that may be due
- Current Liabilities: These are items payable by the business in the fairly near future. Current liabilities would include:
Accruals are the opposite of prepayments; these are expenses the business knows it has incurred that have not yet been charged. These could be utility bills that are issued and paid quarterly in arrears.
In a healthy business, the Current Liabilities will be less than the Current Assets. This is sometimes referred to as Net Current Assets or Working Capital.
- Long Term Liabilities: or Liabilities due after more than one year. These will include loans, mortgages, hire purchase agreements.
Picture this equation: Fixed Assets + Net Current Assets - Long term liabilities = Net assets. This is what the business is worth as at the time the Balance sheet was calculated.
The second part of the Balance sheet is made up of the Capital Accounts sometimes headed "Financed By". The owner's capital is shown here; this will be:
The value of shares issued if it is a Limited company
Partners' accounts for a partnership
Money invested for a sole trader
Directors' Loan A/C's - money owed to the directors by the company or money the directors owe the company
Also included in this section will be reserves brought forward from previous periods, profits/losses made this period and owners' drawings or shareholders' dividends. The total on this section will be equal to the Net Assets in the first part of the balance sheet.
Potential investors can glean a lot of information from this document - not just whether the business is solvent and can be considered a going concern. It's a document essential to anyone involved in planning the future of a business as it tells them where they are starting from.
If you want to know more about how you can use the Balance Sheet together with the Profit and Loss account to plan the future of your business please give me a call +44 (0) 1908 692378 and I'll happily chat this - or any of your bookkeeping requirements - through with you.
Until next time ...
I consider myself to be incredibly lucky because I am a bookkeeper. At the age of thirteen I did a three year course in three months and passed with distinction. Many years have gone by since then and I am still fascinated by the process of double entry bookkeeping. A process developed over 500 years ago by a venetian monk called Luca Pacioli.
Many people would like a machine that they could put all their paper work into at one end and it would come out the other end all sorted totalled and balanced. I'm glad it hasn't been invented because it would take all the fun out of my work!