What is a Balance Sheet?

A balance sheet is one of the 3 basic financial statements of a business. It summarises key information about a business and in some case, it is a legal requirement to prepare one.

Here’s everything you need to know about UK balances sheets, how to make one and a template to help you.

What is a Balance Sheet?

A balance sheet is a financial statement that is a snapshot, on a particular day of a businesses:

  1. Assets – what a business owns and is owed money for
  2. Liabilities – how much the business owes to third parties
  3. Equity – ownership and retained profit

For example, as at the 30 November a business has:

  1. Assets of £10,000
  2. Liabilities of £4,000
  3. Equity of £6,000

But this could change the next day on 1 December as the business receives a new bill that it needs to pay.

A balance sheet is different to a profit and loss statement which shows how much money a business made or lost during a period of time.

Example Balance Sheet

Here is an example of a UK balance sheet

example balance sheet
Example Balance Sheet

What Lines Are on a Balance Sheet

You can see in the example balance sheet above there are certain lines and headings.

In accounting, there are certain prescribed lines and sections that need to be included, in order.

The 3 Sections of a Balance Sheet

A balance sheet has three sections:

  • Assets
  • Liabilities
  • Equity

Balances sheets always show the previous year figures (unless it is their first year trading and there are no figures)

The purpose of showing the previous years (what accountants call “comparatives”) in the same sections is to help readers keep track of changes and letting them make comparatives.

Read this guide to find out How to Read a Balance Sheet.

Lines on a Balance Sheet

Within each of the 3 categories, there are also standard lines that should be followed to help classify assets and liabilities neatly and allow readers to make comparisons.

These lines include:

  • Current Assets
    • Stock
    • Trade debtors
    • Cash
  • Creditors due after one year
    • Bank loans
    • Hire purchase
  • Share Capital and Reserves
    • Called up share capital
    • Share premium
    • Profit and loss account

Why Does a Balance Sheet Always Balance?

Looking at the example above using the balance sheet equation, the net assets is equal to shareholders funds.

This is known as the balance sheet equation.

What is the Balance Sheet Equation?

The balance sheet equation is:

Assets – Liabilities = Equity

A balance sheet balances because of the principles of double-entry bookkeeping.

Who needs to prepare a Balance Sheet in the UK?

If you have a Limited Company then you’ll need to prepare a one as part of filing your accounts with Companies House once a year.

There is no legal requirement for someone who is self-employed to prepare one.

If you are self-employed you’ll need to complete a tax return for HMRC that summarises your income and expenses but a balance sheet is not required.

In fact, if you have a fairly simple business it may not even be cost-effective to prepare one. You’ll probably even know the numbers in your head!

Example

It’s the 31 July and you have £5,000 in your business bank account but you owe £2,000 to a supplier then your balance sheet will capture both these figures on the 31 July.

It will also show that the true net value of your business is £3,000 not the cash in your business bank account.

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About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.

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