Demystifying Your Accounts Part 4 - The Balance Sheet

... back to syllabus

30 Oct 2013

Generally, a company's annual, or management, accounts contain the Profit & Loss Account (as discussed in part 3) and the Balance Sheet. While the P&L gives an overview of the company's performance for a specific period of time, the Balance Sheet shows you what the company owns and owes at a specific point in time. 

The layout of a Balance Sheet will differ depending on the type, and size, of entity it relates to but will always have common components: Assets (which are normally shown as fixed assets and current assets), Liabilities (long-term and short-term assets are generally shown seperately), and Capital (or equity). In simple terms, the assets less the liabilities equals equity and reserves. This value is known as the net value of assets, or simply, the company's worth.

Here is an example of a balance sheet for a small, UK, limited company:

Briefly, we can look at each of these sections separately:

Fixed Assets: these are assets that the company has invested in and are expected to retain long term such as pland and machinery, buildings etc. Typically, the balance sheet will show the depreciated value of these assets.

Current Assets: these are cash or resources whihc are expected to convert to cash within a year of the balance sheet date. For example, accounts receivable which you expect to be paid for is shown as a current asset. Stock, and work-in-progress is also classed as a current asset.

Current Liabilities: these are obligations the company has to pay within a year of the balance sheet date. Corporation tax payable, VAT due on sales, Accounts payable, loans outstanding (but only the element which will require payment in the next year) are all examples of current liabilities.

Long term financing is normally shown seperately under "Long Term Liabilities".

Capital and Reserves: This shows how the Balance Sheet value has beed financed. Generally, shares issued (Capital) plus retained profits (profits which have not been distributed as dividend) are what you will find here but with more compicated structures, you might also find items such as Revaluation Reserves or Merger Reserves here.

Bear in mind also that while you can tell from the Balance Sheet, what the book value of the company is the true value may be completely different: The values of property for example may not be accurate, and depreciated assets might be depreciated at the wrong rate. The balance sheet is also unlikely to contain a value for goodwill, whihc can be loosely defined as the value of the company's ability to generate profits, which is what any buyers of a business likely to pay a premium for.

So that's the main financial statements covered. Next time we'll look at how you can use these figures to assess the financial health and performance of the company by showing you how to calculate key performance indicators based on the data in the statements.