Balance Sheet seems to confuse a few people and I’m not just talking business owners. I’ve known a few bookkeepers over the years who got stuck on balance sheets. In this article, I’m going to try and cover this in really simple terms.
Ok, a balance sheet (I often call a BS … not short for Bull Sh*t) is a summary of your financial position at a certain point in time. So, whereas a Profit & Loss Statement is a statement of your income and expenses and covers a date range, a BS is your net position at one point in time.
So, at the top usually are your assets. These are the things you own. It’s your bank accounts, buildings, motor vehicles, term deposits, trade debtors etc. To complicate things a little, these are actually broken up into Fixed (Non-Current) and Non-Fixed or Current. Essentially a current asset is something which moves all the time in value and is easily liquidated. A great example is your bank accounts – they go up and down and you can withdraw pretty easily. A fixed asset is something more like a building or vehicle. These are larger and harder to liquidate.
Next are your liabilities. These are the things you owe. Things like creditors, loans, credit cards, vehicle HP’s etc. Again like the assets, they can be broken up into fixed (eg 25 year bank loan) versus non-current which might be a credit card.
So then you deduct your liabilities from your assets and you are left with proprietorship, or your net ownership. The formula is:
A (assets) minus L (liabilities) = P (proprietorship).
Now hopefully the value of your assets is greater than your liabilities, so that the net value of your business is in the ‘black’ and a positive figure.
Again, as I have said before, be sure you review your Balance Sheet from your bookkeeper at least once a month and if you spot a single item on it that you don’t understand or have a strange balance against it – ask! A quality bookkeeper will be more than happy to explain why the figure exists and if they cannot, you may need to ask your accountant.
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If you’d like to know more about Profit & Loss Statements, click here.