What is a balance sheet?

The balance sheet is one of the statements every business prepares at the end of each financial year. It’s a snapshot of the business’s assets, liability, and equity on a specific date.

Why is a balance sheet important?

While a profit and loss account is considered the most important financial statement (because it shows the profit), the balance sheet can reveal other relevant information.

A business may seem to be profitable, but the balance sheet may indicate otherwise:

  • Cash balance – if a business is making a profit, where is the money going?
  • Accounts receivable – if these are high, is the business having problems with its customers paying?
  • Accounts payable – a high balance may mean the business is struggling to find cash to pay its suppliers and employees
  • Property, plant, and equipment – what assets does the company have, and how appropriate are they for the business operations?
  • Loans – are these being paid off, or increasing?
  • Equity – a negative result (liabilities exceed assets) can signal insolvency
Who uses balance sheets?

Anybody asking for a business’s profit and loss account will also want to see the balance sheet. They go hand-in-hand:

  • The balance sheet may have more assets than liabilities, but how profitable is the business?
  • The profit and loss account may show high profits, but why is there very little cash?

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It’s now time to explore each of the elements included in a balance sheet. If you’re ready, head over here.

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