If the profit and loss shows how you performed over a period, the balance sheet shows where you stand on one particular day. It lists what the business owns, what it owes and what is left for the owners. Lenders, accountants and buyers all look at it. If you have read our guide to the profit and loss statement, this is the other half.
The three parts
- Assets: what the business owns.
- Liabilities: what the business owes.
- Equity: the owner’s stake. It equals assets minus liabilities.
It always balances: assets = liabilities + equity. See what double-entry bookkeeping is for why.
Assets
- Current assets will turn into cash within about a year: bank balances, money owed by customers (receivables), stock and prepayments.
- Non-current (fixed) assets are used for longer: equipment, vehicles and property, shown at cost less depreciation.
Liabilities
- Current liabilities are due within a year: supplier bills (payables), VAT and tax owed, credit cards.
- Non-current liabilities are due later: long-term loans.
Equity
Equity includes the money you put in, retained profits from past years and the current year’s profit, less anything you took out as drawings or dividends.
A small example
- Bank £12,000, receivables £8,000, equipment (net) £5,000. Total assets: £25,000.
- Payables £4,000, VAT owed £2,000, loan £6,000. Total liabilities: £12,000.
- Equity: £13,000 (£25,000 minus £12,000).
What to look at
- Current ratio: current assets divided by current liabilities. A figure above 1 means you can cover short-term bills. In the example, £20,000 divided by £6,000 is 3.3.
- Receivables: a growing figure means customers are paying more slowly. See profit vs cash flow.
- Loans and debts: are they growing faster than assets?
- Equity: is it growing over time?
Common mistakes
- Confusing the balance sheet with the profit and loss.
- Forgetting to record equipment or loans.
- Not reconciling the bank, so the cash figure is wrong.
How AvrioBooks helps
Run the balance sheet at any date and export it to PDF, Excel or CSV. See financial reports and the help guide Run and export a report.
Frequently asked questions
What does a balance sheet show?
What the business owns (assets), what it owes (liabilities) and what is left for the owners (equity) on a particular date.
What is the difference between current and non-current?
Current items are expected to turn into cash or be paid within about a year. Non-current items last longer.
What is the current ratio?
Current assets divided by current liabilities. Above 1 suggests you can cover short-term bills.
Can I run a balance sheet in AvrioBooks?
Yes. Run it at any date and export it to PDF, Excel or CSV.
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