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FINANCIAL LITERACY •  5 MARCH 2021 • 4 MIN READ

What’s included in a balance sheet?

What’s included in a balance sheet?

Up to speed on why balance sheets are so important? Now you’re ready to understand them inside-out.

This financial statement acts like a snapshot of your business’s assets, liabilities and equity at a specific date. That information can be used in conjunction with your profit and loss account to calculate income tax, meet legal requirements and spot opportunities to optimise.

Assets

These are items belonging to the business, which we split into the categories current and non-current.

Current assets

We class current assets as those likely to be converted into cash within 12 months of the balance sheet date. It means the value shown in the balance sheet is likely to match the eventual cash the business will receive.

Non-current assets

These assets are used to carry out business activities or generate interest or dividends for the company. They aren’t expected to be converted into cash within 12 months (though, they can be).

While their value is recorded at their original purchase price, it’s important to keep in mind that that isn’t necessarily what they’d be worth if they were to be sold. For example, vehicles and machinery decrease in value over time, and land values can increase.

Liabilities

A liability is money you owe to another person or organisation. As with assets, we separate these into current and non-current.

Current liabilities

Current liabilities are expected to be paid within 12 months of the balance sheet date.

Non-current liabilities

Non-current liabilities don’t usually require payment within the next 12 months. The most common type of non-current liability is a long-term loan.

Equity

The equity section is what you might call the balancing figure and it represents the ultimate value of the business to its owners.

Equity = assets – liabilities 

Within equity, retained earnings is the most interesting figure. It represents the profits from previous years that have been kept in the business, rather than paid out to shareholders.

Equity for sole traders

Equity (called the Capital Account in your financial statements) will comprise your profits to date, the money you’ve deposited in the business bank account, and drawings. 

It’s possible for equity to become negative – when liabilities exceed assets. Such situations are an indicator of insolvency – the business’s ability to continue operating. If this applies to you now or appears likely in future, we urge you to seek professional advice. There can also be serious legal consequences for continuing to trade while insolvent.

Specific Date

We treat a balance sheet like a snapshot of asset’s liabilities and equity on a specific date. Let’s see what it can look like at 31 March 2021:

Assets

Bank account – $3,000
House – $782,000
Total assets – $785,000

Liabilities

Credit card balance – $1,000
Mortgage – $523,000
Total liabilities – $524,000

Equity

Net worth – $261,000 ($785,000 less $524,000)

Changes during the year:
  • On 1 April 2021, you borrow $4,500 to purchase a vehicle
    • The asset and the loan will not be included in the balance sheet at 31 March – they didn’t exist at that date (for you). On
      1 April 2021 your assets and liabilities would both increase by $4,500
  • On 31 October 2021, you have an unconditional agreement to sell the house for $825,000; settlement will take place on 30 November 2021
    • At 31 October 2021, your equity has increased by $40,000 ($825k less $785k), and is now $301k. The $40k increase doesn’t mean your equity at 31 March was incorrect – it’s just that we’re recording the value of the asset at a different date

Who are Beany? 

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world. ​

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.

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