The balance sheet provides a snapshot in time of an organisation.  It is often referred to as the Statement of Financial Position and is generally a backward glance at the business, that is, how it looked at a particular date.

The Balance Sheet shows the balances of the Assets, Liabilities and Equity of the organisation.

Assets – Liabilities = Equity

Assets are things that a business owns. Some examples of assets, are cash at bank, accounts receivable (debtors), plant and equipment, land and buildings and motor vehicles.  Some organisations will have all of these assets and some may only have a few.

Liabilities are things that the business owes to others.  Some examples include Accounts Payable (Creditors), GST, PAYG, Superannuation, bank loans, hire purchase loans and chattel mortgages.

Equity is the difference between the assets of the company and the liabilities of the company.  It indicates that if you closed the organisation down on the date of the balance sheet, you would have the amount left over that is in equity.  The higher this number is, the better off your organisation is. Another term for Equity is your Net Worth.

In your Equity section is Retained Earnings and Current Year Earnings.  This is the cumulative value of your business’s profits and losses over all of the years it has been operating.  It is generally not cash, but rather the funds used previously to help build your assets.

Balance Sheets are used to look at how the business is progressing over time.  It is a document that banks want for financing, so you want to make sure that it is accurate before you send it to them.  It can show you in rough terms, if you had to sell your assets, and pay off your debts, how much will be left at the end (depending on the price you get vs the value showing on your balance sheet).

Valuing your Balance Sheet can be tricky when there's lots of ways to value your assets.  For example, traditional accounting says that we add a motor vehicle to your asset list at Cost.  However, that's not generally how much you can sell it for, nor is it how much you can replace it for (the insurable value).  Accounting & tax rules can make your balance sheet values over or under-inflated, so it's important to know what the numbers are so that you can check them regularly.

Do you understand your balance sheet? Our experts can help you organise and analyse your balance sheet to make it easier for you to understand and also so that you can check it regularly.

Book an appointment with us to see if we can give you the skills you need to level up you Balance Sheet reading skills: https://app.acuityscheduling.com/schedule.php?owner=18230665&appointmentType=30511102