Balance Sheet: the Basics

Topics: Balance sheet, Asset, Generally Accepted Accounting Principles Pages: 38 (8141 words) Published: December 1, 2012
Balance sheets: the basics

A balance sheet is a financial statement at a given point in time. It provides a snapshot summary of what a business owns or is owed.

It states what assets the business ownes and what it owes – liabilities, at a particular date.

The balance sheet is uded to show how the business is being funded and how those funds are being used.

The balance sheet is used in three ways:

• for reporting purposes (limited company's annual accounts)  • help interested parties assess the worth of your business at a given moment - such as investors, creditors or shareholders • helps you analyse and improve the management of your business

You must consider who is the best person to produce balance sheets and when. This document shows the different elements to inlude in a balance sheet and and how to use the information from to assess and manage business performance.

Who must produce a balance sheet?

Limited companies and limited liability partnerships must produce a balance sheet as part of their annual accounts.

The balance sheet will then need to be submitted to:

• Companies House
• HM Revenue & Customs (HMRC)
• shareholders - unless agreed otherwise

The other annual document you must produce is the profit and loss account.

Other parties who may wish to see the accounts are:

• potential investors or lenders (banks)
• potential purchasers of the business
• employees
• trade unions

There are strict deadlines for submitting annual accounts and returns to Companies House and HMRC - penalties will apply if they are received late. Their websites can be found in the ‘useful links’ section.

Other business structures

Self-employed people, partners and partnerships are not required to submit formal accounts and balance sheets on their tax return. You should still produce a balance sheet so that you are aware of your business activity.

Contents of the balance sheet

A balance sheet shows:

1. fixed assets - long-term
2. current assets - short-term
3. current liabilities - what the business owes and must repay in the short term 4. long-term liabilities - including owner's or shareholders' capital

The balance sheet is so-called because there is a debit entry and a credit entry for everything, so the total value of the assets is always the same value as the total of the liabilities.

Fixed assets

• tangible assets - eg buildings, land, machinery, computers, fixtures and fittings. Show them at their resale value. • intangible assets - eg goodwill, intellectual property rights (such as patents, trademarks and website domain names) and long-term investments

Current assets

These are short-term assets whose value can fluctuate from day to day.

For example:

• stock
• work in progress
• money owed by customers
• cash in hand or at the bank
• short-term investments
• pre-payments - eg advance rents

Current liabilities

These are amounts owed to you and due within one year. These include:

• money owed to suppliers
• short-term loans, overdrafts or other finance
• taxes due within the year - VAT, PAYE (Pay As You Earn) and National Insurance

Long-term liabilities include:

• creditors due after one year - the amounts due to be repaid in loans or financing after one year, eg bank or directors' loans, finance agreements • capital and reserves - share capital and retained profits, after dividends (if your business is a limited company), or proprietors capital invested in business (if you are an unincorporated business)

By law the balance sheet must include the elements shown above in bold. However, what each includes will vary from business to business. The firm's external accountant will usually decide how to present the information, although if you have a qualified accountant on staff, they may make this decision.

Interpreting balance sheet figures...
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