The Balance Sheet
The balance sheet will show the financial position of your business at a defined date. It is, therefore, merely a snap-shot of your business. The actual figures listed will have fluctuated throughout the year as your business makes sales and purchases. The individual components of the balance sheet will come under three headings:
The first two headings will have a number of sub-headings relating to the individual asset and liability accounts that are in your books. The final heading, capital, will vary depending on what type of business you have. In simple terms at this stage these can be as follows:
- Sole trader - owner's capital account
- Partnership - partner's capital accounts (individually itemised)
- Limited Company - share capital.
How is it Compiled?
The balance sheet is compiled from the asset and liability figures taken from your trial balance. These figures are placed in a logical format in order to arrive at the net worth, or surplus resources, of your business.
In an ideal world, the figure should always be positive. This means that you have a surplus of assets over liabilities and, if the business were to fail, you would be able to pay off all of your creditors.
If the figure is negative this means that your liabilities exceed your assets. Without an injection of cash into the business, preferably from your own resources, the business would be unable to meet its debts as they become payable. If you encounter this situation you must seek the immediate advice of your accountant. Even if you operate as a limited company you could still incur personal liability under certain circumstances if you continue to trade.
Is it an Accurate Value of the Business?
The plain and simple answer is no. The balance sheet is compiled using the 'book' value of assets. For example, if you purchase a motor vehicle the actual cost is entered in the books. Over time this may be reduced by depreciation. This will still not represent the actual resale value of the vehicle should it become necessary to sell it. It could recover more, or less, than the defined 'book' value.
As a further example, consider the accounts of your debtors, the people who owe you money for goods or services that you have provided. When you compile your balance sheet you are making the assumption that all your debtors will meet their obligations. It is possible that some of them may fail to pay their debt. This will, of course, affect the value of your business as well.