The balance sheet can give you a snapshot of your business’s financial situation at a specific time. It’s broken up into three parts: assets, liabilities and owners’ equity.
Assets are things that are worth something today or will provide you with value later. They are often categorised as either current assets or fixed assets:
- Current assets are cash and items that you plan to use or sell within a year, such as the cash in your account or products on your store’s shelves.
- Fixed assets are physical assets that you’ll use for more than a year, such as a vehicle, machinery or property.
Liabilities are the money that your business owes other people or businesses. They are split into:
- Current liabilities that you must pay within the following year, such as your taxes, unpaid bills for supplies and employees’ wages. It can also include the portion of loan or rent payments that are due within the next year.
- Long-term liabilities, which are debts you’ll owe more than a year from now. Long-term liabilities could include the total cost of repaying a loan or completing your rental agreement.
The owners’ equity portion of the balance sheet shows what’s left over for the owners of the company and how the company used funds that could have been paid out to its owners.
Owners’ equity is made up of:
- Common stock/partners’ equity: The people who own a corporation own the company’s stock. For small businesses that aren’t corporations, the owners might not own stock, but still have a claim of ownership. On the balance sheet, this line shows how much money the business’s owners can currently claim.
- Retained earnings: When a company makes a profit, it could either pass the money on to the owners or hold onto the money (i.e., retain the earnings) and use the funds to increase its assets or pay down liabilities. When a company retains its earnings, it should include that money on the balance sheet in the owners’ equity section.
For small businesses, the owners’ equity could also be viewed as the business’s current net worth, as it’s the money that’s left over for the business owners if the business collected all the money it's owed, turned its non-cash assets into cash and paid all of its debt.
Once you create your balance sheet, you can use the accounting formula for a balance sheet to double-check it’s correct:
- Assets = liabilities + owners’ equity
Each time the company’s assets increase, either someone else can claim the increased value (liabilities increase) or the business’s owners can claim the increased value (owners’ equity increases).
If you’re the sole owner of your business and want to figure out how much money is left over after the business pays its debt, you could rearrange the balance sheet formula into:
- Owners’ equity = assets - liabilities
For example, if a business has £40,000 in the bank and £10,000 worth of inventory, its current assets are £50,000. It may owe £45,000 for rent, taxes and to pay workers. The remaining £5,000 is the owners’ equity.
You can also compare a balance sheet from one period to a balance sheet from a different period to see if your company’s assets, liabilities or overall value is increasing or decreasing.
Here is a template you can use for your business. Feel free to edit it as you need, adding rows or combining different types of assets or liabilities.