A balance sheet is an important document that showcases a business’s financial position. It helps indicate exactly what your business owns and the amount of money that’s been invested by its owners. Balance sheets can be complex to understand – but not to worry, we’re here to help.
To learn more about what balance sheets are and how useful they can be, read on.
Balance Sheet in Simple Terms
What is a balance sheet? A balance sheet is a report of the financial affairs of your business during a specific period. It includes key information, from your company’s assets to liabilities and other important statements to help evaluate your capital structure. A balance sheet is useful, providing a financial snapshot to potential shareholders before negotiation.
How Does a Balance Sheet Work?
A balance sheet works using a simple equation:
Assets = Liabilities + Shareholders’ Equity
This equation helps gain insight into your business’s financials during a set period (usually quarterly or annually). A balance sheet works to highlight three main points – what your business owes, what it owns, and what belongs to owners or shareholders.
Knowing what’s due to be owed and what you already own is essential when it comes to finance, and a balance sheet allows you to find out exactly that.
Assets, Liabilities, and Equity
Let’s break down the three key aspects that help form a balance sheet – assets, liabilities, and equity.
| Type | Location | Including |
|---|---|---|
| Assets | The first column | Anything your company owns, such as current assets and non-current assets, like items sold for profit, prepaid expenses, money owed, and investments |
| Liabilities | The second column | Anything payable to an outside party, such as owed debt, overdrafts, interest, tax payments, staff wages, and office rent |
| Equity | Underneath the liabilities column | The amount funded by company owners or shareholders and the amount left after subtracting liabilities from assets, which shows what your company owns outright |
Why is a Balance Sheet Important?
A balance sheet is important in business for many reasons, as it shows vital information regarding your company’s financial standing. Balance sheets help to:
- Determine potential risks
- Show what your company owns
- Provide insight into your company’s debt
- Help assess your company’s financial position
- Secure business loans
- Support key decision-making
- Manage cashflow
Without a balance sheet, your company could struggle to stay on top of its finances. Whether you’re a small business or a private limited company, financial forecasting is key. Many businesses struggle to notice they’re in financial danger before it’s too late, but with a balance sheet, you can make more informed decisions and attract potential investors.
Who Prepares Balance Sheets?
It’s entirely up to the business owner to decide who takes leadership of a balance sheet. However, the best people to prepare a balance sheet are bookkeepers. It’s recommended to hire a professional bookkeeper to prepare your balance sheet to ensure efficiency. While someone within your company can prepare a balance sheet, it’s often not advised.
Professionals can keep accurate, timely, and backed-up financial records, making it easier than ever for your company to track finances and remain compliant. Working with a bookkeeper allows peace of mind and more free time to focus on other areas of your company without the workload taking over.
Note: Providing incorrect information or using discrepancies could flag your balance sheet as suspicious during an audit check, leading to long-term debt. At LJS Accounting Services, we will ensure this won’t happen.
Does Your Small Business Need a Balance Sheet?
It’s not a legal requirement for small businesses to have a balance sheet, but it’s valuable to have one. Balance sheets offer several key benefits, from providing financial insight into your company to making it easier to attract potential investment and secure business loans. While you might be thinking your small business doesn’t need a balance sheet, it probably does.
Balance sheets aren’t just useful for tracking what you own or owe – they can help your small or start-up business monitor financial stability, which is incredibly important during the first stages of owning a company. With this, you can make better decisions and consider future financials to ensure growth and success.
Key Takeaways
- A balance sheet is a report of the financial affairs of your business during a specific period
- A balance sheet works using a simple equation: Assets = Liabilities + Shareholders’ Equity
- Bookkeepers are best for preparing financial statements, such as a balance sheet
Do You Require Forecast and Projections Services?
If you require assistance preparing balance sheets, we can help. At LJS Accounting Services, we understand how tedious it can be not knowing where your company is heading financially.
We provide excellent Forecast and Projections services across the UK to ensure companies like yours are equipped with accurate and efficient financial statements, including balance sheets.
We assist our clients in creating a sustainable business strategy from the start, ensuring everything is set in other areas of their business before taking care of their balance sheet. Let us track your sales, stock, and cash transfers today.
Contact our helpful team of trusted accountants today for more information. We look forward to speaking soon!
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
