The Balance Sheet

The balance sheet is produced at the end of a company’s financial year, and is a snapshot of its financial situation.  It shows the company’s assets and liabilities at that point in time.

There are two halves to a balance sheet.  The top half shows where the money is being used in the business (the net assets), and the bottom half shows where this money came from (the capital employed).  The total of each half should be the same, hence the expression balance sheet.

There are two kinds of assets – long-term and short-term.  The long-term assets are known as fixed assets, and include the land, buildings, machinery and vehicles that are used in connection with the business.  All fixed assets except land are depreciated as they wear out over time.  The total fixed assets are the value of the fixed assets, less the accumulated depreciation.

The short-term assets are known as current assets, and include cash, stocks and receivables that are due within one year.

The top half of the balance sheet also includes liabilities, that is all debts and obligations owed by the business to creditors.  Current liabilities are those debts that must be paid within the year, such as wages earned but not yet paid.  Long-term liabilities may include mortgages and other loans that will not have been paid off within the year.

The top half of the balance sheet therefore consists of the total of fixed and current assets, less the current and long-term liabilities, giving the net assets.

The bottom half of the balance sheet shows where this money came from.  For a limited company, this will include the money raised by issuing shares, and is known as the share capital.  The business may also have ploughed some of the money back into building up the business.  This is called retained profit.

The bottom half of the balance sheet therefore consists of the total of share capital and retained profits, giving the capital employed.