As the name of the document implies, the separate sections of your balance sheet need to balance. The theory is that what your business owes, as well as the money it has available, are what\u2019s funding its assets.<\/p>\n\n\n\n
This means the total assets should equal the combined total of your liabilities and equity. The balance sheet formula you need is:<\/p>\n\n\n\n
Assets = Liabilities + Shareholder Equity\n<\/p>\n\n\n\n
What is a statement of financial position?<\/h3>\n\n\n\n
\nYou may also see a balance sheet called a statement of financial position, which shows a business’s value on a particular date. <\/p>\n\n\n\n
A statement of financial position helps a business to monitor its incomings and outgoings.<\/p>\n\n\n\n
A balance sheet is just one element of business accounting you can use to understand your financial position \u2013 other statements to look at include your profit and loss account, and cash flow.<\/p>\n\n\n\n
What does a balance sheet show?<\/h2>\n\n\n\n
A balance sheet is useful because you can see:\n<\/p>\n\n\n\n
- \n
- how easily you can access money, by looking at your current assets<\/li>\n\n\n\n
- how much financial risk you can take on, by comparing equity against your liabilities<\/li>\n\n\n\n
- how efficiently your business can generate revenue using its assets, by comparing your balance sheet to the profit and loss account<\/li>\n<\/ul>\n\n\n\n
\n\n\n\nDownload your balance sheet template<\/h2>\n\n\n\n
Your business\u2019s assets, liabilities, and shareholders\u2019 equity get broken down even further on the balance sheet itself.<\/p>\n\n\n\n
Download your free balance sheet template to cross-check this section against the terms used in the balance sheet, so you know how to fill it in.<\/p>\n\n\n\n
Download<\/a><\/div>\n\n\n\n
\n\n\n\nPlease treat this article and template as a guide only \u2013 it\u2019s not financial advice. If you run a limited company you won\u2019t be able to use our balance sheet to complete statutory accounts. <\/p>\n\n\n\n
It\u2019s always best to speak to a professional accountant or adviser about your business\u2019s finances.<\/p>\n\n\n\n
\nHow to read a balance sheet<\/h2>\n\n\n\n
A balance sheet format usually includes the company\u2019s assets first, followed by its liabilities and shareholders’ equity.<\/p>\n\n\n\n
It\u2019s important to understand the difference between assets such as cash, accounts receivable, and inventory (see below), as well as what they mean for a business\u2019s finances. <\/p>\n\n\n\n
\n<\/div>\n\n\n\nOn the liabilities side, the key thing to understand is the difference between current and long-term.<\/p>\n\n\n\n
When reading a balance sheet, you\u2019ll be aiming to work out if the company\u2019s finances are \u2018in balance\u2019, where the value of the assets are equal to the combined value of liabilities and shareholders’ equity.<\/p>\n\n\n\n
Balance sheet example: assets\n<\/h2>\n\n\n\n
This goes on the left side (or top) of the balance sheet. You separate what your business owns into current assets and fixed assets.<\/p>\n\n\n\n
This is in order of liquidity \u2013 meaning the assets that you can convert into cash more easily go at the top. Read our guide to liquidity in business<\/a> to find out more about how it works.<\/p>\n\n\n\n
Current assets are what you use day-to-day when running your business, and you\u2019ll typically use them within a year (for instance, the money in your business bank account<\/a>).<\/p>\n\n\n\n
Current assets include:<\/p>\n\n\n\n
- \n
- cash<\/strong> \u2013 this could be money you have readily available, for example it\u2019s in your bank account, or you have cheques you need to pay in (a cash flow forecast<\/a> can help you plan for your cash inflows and outflows over 12 months)<\/li>\n\n\n\n
- accounts receivable<\/strong> \u2013 money that\u2019s owed to you in the short-term, for example outstanding invoices that you\u2019ve sent to customers and clients<\/li>\n\n\n\n
- inventory<\/strong> \u2013 your stock, items, and works-in-progress that you\u2019ll be selling to customers (you have to own these already)<\/li>\n\n\n\n
- temporary investment<\/strong> \u2013 short-term investments that you can easily convert into cash (equities aren\u2019t included here, because their value fluctuates often)<\/li>\n\n\n\n
- prepaid expenses<\/strong> \u2013 including rent, energy, and business insurance<\/a><\/li>\n<\/ul>\n\n\n\n
Fixed assets and long-term assets. These can depreciate in value and also include items you own that aren\u2019t tangible, like intellectual property and customer goodwill (your business\u2019s reputation). <\/p>\n\n\n\n
Fixed assets include:<\/p>\n\n\n\n
- \n
- property and equipment<\/strong> \u2013 buildings, land, machinery, and equipment (for example computers) that your business owns (be sure not to include equipment as a current asset under inventory \u2013 it should go here)<\/li>\n\n\n\n
- leasehold improvements<\/strong> \u2013 these are changes you\u2019ve made to the commercial property that you rent, including redecorating<\/li>\n\n\n\n
- equity and other investments<\/strong> \u2013 investments that you can\u2019t convert into cash easily and that fluctuate in value<\/li>\n\n\n\n
- less accumulated depreciation<\/strong> \u2013 how you estimate assets to lose value over time \u2013 for example, if you expect a computer that costs \u00a31,500 to last five years, you can divide \u00a31,500 by five to get a depreciation of \u00a3300 a year\n\n\nIn our balance sheet template, there\u2019s space to include more assets, including intangible assets like intellectual property.<\/li>\n<\/ul>\n\n\n\n
![\"Business](\"https:\/\/www.simplybusiness.co.uk\/wp-content\/uploads\/sites\/3\/2024\/05\/business-people-in-office.jpg?w=1024\")
<\/figure>\n\n\n\nHalfpoint\/stock.adobe.com<\/em><\/p>\n\n\n\n
Balance sheet example: liabilities\n<\/h2>\n\n\n\n
A balance sheet usually includes liabilities on the right side (or the bottom). Like assets, you can break liabilities down into current liabilities and long-term liabilities.<\/p>\n\n\n\n
Current liabilities include liabilities like rent and utilities, which are due over the next 12 months, while long-term liabilities include liabilities like loans that are due to be paid after 12 months.<\/p>\n\n\n\n
On our balance sheet template, current liabilities include:<\/p>\n\n\n\n
- \n
- accounts payable\/trade creditors<\/strong> \u2013 money that your business owes for goods and services<\/li>\n\n\n\n
- accrued compensation<\/strong> \u2013 money that your business owes for goods and services that you haven\u2019t received, and that you haven\u2019t been invoiced for yet<\/li>\n\n\n\n
- income taxes payable<\/strong> \u2013 money that you owe for taxes<\/li>\n\n\n\n
- unearned revenue<\/strong> \u2013 money received from a customer or client for work that your business hasn\u2019t done yet<\/li>\n\n\n\n
- any other liabilities<\/strong> \u2013 current liabilities that don\u2019t fall under the above categories<\/li>\n<\/ul>\n\n\n\n
Long-term liabilities include:<\/p>\n\n\n\n
- \n
- mortgage<\/strong> \u2013 long-term loans for land or property that your business owns<\/li>\n\n\n\n
- other long-term liabilities<\/strong> \u2013 these could include deferred tax payments and other liabilities that you don\u2019t need to pay back for at least 12 months<\/li>\n<\/ul>\n\n\n\n
Balance sheet example: shareholders\u2019 equity (or simply owner\u2019s equity)<\/h2>\n\n\n\n
This part of the balance sheet goes below the liabilities section. It refers to the amount of money generated by a business \u2013 your net assets.<\/p>\n\n\n\n
The balance sheet formula for this section is:\n<\/p>\n\n\n\n
Shareholders\u2019 Equity = Total Assets \u2013 Total Liabilities<\/p>\n\n\n\n
On our balance sheet template you can see under this section:<\/p>\n\n\n\n
- \n
- capital stock<\/strong> \u2013 shares that a company has and can sell (essentially this is a liability, because this is what the business would owe to its owners if the business was sold)<\/li>\n\n\n\n
- retained earnings<\/strong> \u2013 income that\u2019s been kept by the business rather than distributed to owners<\/li>\n<\/ul>\n\n\n\n
If you\u2019re a sole trader<\/a> or unincorporated business, you might be wondering what shareholders\u2019 equity means for you. It essentially represents how much you\u2019ll be left with if you decide to stop trading, sell your business assets, and pay off your business liabilities. Our article on equity in business<\/a> has more information.<\/p>\n\n\n\n
In this case, capital stock is the money you paid into the business to set it up, before you started making money. Retained earnings is effectively ‘the rest’ \u2013 the money the business has made while it\u2019s been operating that hasn’t gone into things like paying bills or buying materials. This can be paid out to the sole trader.<\/p>\n\n\n\n
Creditors and debtors \u2013 what do you need to know?<\/h2>\n\n\n\n
As a small business you can be both a creditor and debtor. For example, you can have debtors to your business (customers), making you the creditor.<\/p>\n\n\n\n
At the same time, you can be a debtor to another business (such as a supplier), in which case they\u2019re the creditor.<\/p>\n\n\n\n
It\u2019s important to understand what these terms mean when filling out the assets and liabilities sections of your balance sheet.<\/p>\n\n\n\n
What is a debtor?<\/h3>\n\n\n\n
The debtors meaning is: any business or individual that owes money to a business because they\u2019ve been provided with a service or product, or borrowed money from another business or individual.<\/p>\n\n\n\n
If your business borrows money from a bank to hire more staff you become a debtor to the bank, which is the creditor.<\/p>\n\n\n\n
When you buy the supplies you need to run your business, you become a debtor to the supplier.<\/p>\n\n\n\n
If a customer hasn\u2019t paid an invoice<\/a> and owes you money, then they\u2019re a debtor to your business. All the money you\u2019re owed by customers for a product or service you\u2019ve provided is known as trade receivables.<\/p>\n\n\n\n
What is a creditor?<\/h3>\n\n\n\n
The creditors meaning is: any business that’s owed money because they\u2019ve provided a service or product, or lent money to another business or individual.<\/p>\n\n\n\n
When a bank lends money to a small business, the bank is known as a loan creditor.<\/p>\n\n\n\n
Suppliers to other businesses are known as trade creditors. For example, a coffee bean producer that supplies its beans to a coffee shop would be a trade creditor.<\/p>\n\n\n\n
It\u2019s not uncommon for small businesses to be creditors but also owe money to other creditors.<\/p>\n\n\n\n
What do debtors and creditors mean for your balance sheet?<\/h2>\n\n\n\n
It\u2019s important to record details of your business\u2019s debtors and creditors on your balance sheet.<\/p>\n\n\n\n
All the money you owe to creditors should go on the liabilities section of your balance sheet, while the money you\u2019re owed by debtors can be considered assets.<\/p>\n\n\n\n
Although being owed money can be considered an asset, late payments<\/a> can cause financial issues for small businesses.<\/p>\n\n\n\n
On top of this, you could encounter problems if you have a significant amount of debt owed to creditors on your balance sheet. <\/p>\n\n\n\n
Balance sheet and statutory accounts<\/h2>\n\n\n\n
If you run a limited company<\/a>, your balance sheet forms part of your annual (statutory) accounts. These need to meet accounting standards, so you should speak to your accountant or tax adviser \u2013 you won\u2019t be able to use our balance sheet template.<\/p>\n\n\n\n
Read more about preparing statutory accounts for your limited company<\/a>.<\/p>\n\n\n\n
More useful guides for small business owners <\/h3>\n\n\n\n
- \n
- How to budget: a budget calculator and guide for the self-employed<\/a><\/li>\n\n\n\n
- Cost of living support for small businesses and the self-employed<\/a><\/li>\n\n\n\n
- What is asset finance?<\/a><\/li>\n\n\n\n
- What type of business insurance do I need?<\/a><\/li>\n<\/ul>\n\n\n\n
Do you use a balance sheet to understand the health of your business? Let us know in the comments below.<\/strong><\/p>\n\n\n\n
\nReady to set up your cover?<\/h3>\n\n\n\n
As one of the UK’s biggest business insurance<\/a> providers, we specialise in public liability insurance<\/a> and protect more trades than anybody else. Why not take a look now and build a quick, tailored quote?<\/p>\n\n\n\n
- Cost of living support for small businesses and the self-employed<\/a><\/li>\n\n\n\n
- retained earnings<\/strong> \u2013 income that\u2019s been kept by the business rather than distributed to owners<\/li>\n<\/ul>\n\n\n\n
- other long-term liabilities<\/strong> \u2013 these could include deferred tax payments and other liabilities that you don\u2019t need to pay back for at least 12 months<\/li>\n<\/ul>\n\n\n\n
- accrued compensation<\/strong> \u2013 money that your business owes for goods and services that you haven\u2019t received, and that you haven\u2019t been invoiced for yet<\/li>\n\n\n\n
- leasehold improvements<\/strong> \u2013 these are changes you\u2019ve made to the commercial property that you rent, including redecorating<\/li>\n\n\n\n
- accounts receivable<\/strong> \u2013 money that\u2019s owed to you in the short-term, for example outstanding invoices that you\u2019ve sent to customers and clients<\/li>\n\n\n\n
- cash<\/strong> \u2013 this could be money you have readily available, for example it\u2019s in your bank account, or you have cheques you need to pay in (a cash flow forecast<\/a> can help you plan for your cash inflows and outflows over 12 months)<\/li>\n\n\n\n