Simple Business Accounting - The Balance Sheet
A profit and loss account records the flows of money coming into and out of the business over a period of time. This is a useful document for a business to see how it is performing.
A balance sheet is quite different. A balance sheet records the assets and liabilities of a business at a particular point in time - it is a stock rather than a flow.
To understand the difference between a stock and a flow, think about a bath. If you turn on the taps but have the plug left out, there will be water flowing into the bath (your revenue) and water flowing out of the bath (your expenditure). If the amount of water flowing into the bath is greater than that flowing out, the bath will start to fill up. The amount of water in the bath at any one time is the stock of water.
Again, we have some terms to contend with here. We have already defined assets and liabilities but we will have to understand the difference between 'current assets' and 'fixed assets' and 'short term liabilities' and 'long term liabilities' to construct our balance sheet.
Fixed Assets: Things owned by the business that will last for more than one year and are not used up in production. In our example, the fixed assets will be the things like the shed, the boxes, the moneybox and the coats.
Current Assets: Things owned by the business that will be kept for less than one year and which are used up in production. These might be raw materials and stocks of goods used in production. In our example the fruit we have each day will be our current assets.
Long-term liabilities: Money owed by the business that will not have to be paid back within the next year.
Short-term liabilities: Money owed by the business, which has to be paid back within a year. In our example, the money borrowed fromyour parents represents your short-term liabilities.
One way of thinking about a balance sheet is to think about your own position. You presumably own a lot of different things - clothes, some cash, a bank account, a mobile phone, DVD player, MP3 player etc. These are your assets.
The funds to pay for these assets must have come from somewhere - they may have been presents, maybe you bought them yourself from your savings or from money given to you for your birthday or through a part-time job. For a business, the assets must have been financed in some way in exactly the same fashion; the liabilities tell us where this money came from.
For a large business, the funds to acquire its assets may have come from shareholders, loans from large banks and also from profits that it has kept back to put into the business. In our example, the funds to set up the business have come from the loan from your parents and the £20 each of you agreed to put in. Let us assume that this represents your 'share' of the business.
Many large businesses will have many assets, including buildings and machinery and equipment - the money to acquire these assets must have come from somewhere! Copyrights: Anthony Thomas and Jorge Vicente, both from stock.xchng.
The balance sheet allows us to present all this information in a table. Remember that this is a snapshot of a business's assets and liabilities at a particular point in time .
Use the table below to complete the balance sheet for our business - assume the estimated value of the shed is £30.
|Balance Sheet for Fruit28 as at dd/mm/yyyy|
|Short term (current) liabilities|
|Total Assets less current liabilities|
Please find a printable version of this balance sheet here.
Please go here for a completed version of this balance sheet.
This is a very simplified version of a balance sheet but the basic principle is the same - even for very big businesses. You can see more detailed examples of balance sheets by going to the Financial Data request form in Biz/ed's Company Profile section.