A balance sheet is only a snapshot of a business’ financial position on one particular day. It is called a balance sheet because there is a debit entry and a credit entry for everything (but one entry may be to the profit and loss account), so the total value of the assets is always the same value as the total of the liabilities.
At the year end/or period) any expenses incurred need to relate to the actual year end (or) period. If half of an expense crosses over into the following year, then half of that expense is placed on the balance sheet as a ‘prepayment’ and classed as an asset. These prepayments occur when a debt or installment payment is made before its official due date, whether it is for the entire balance or payment in advance of the date for which the payment is due. On the first day of the following year the expense is taken from the prepayments and returned to expenses.
An expense that comes in the following year which relates to the previous year, is returned to the previous year and at year-end the balance sheet is credited in accrued expenses (accruals). This cancels the expense for that year. These accruals occur as expenses which have been incurred during that period or year end where a) the benefits have already been taken but the payments have not yet been paid, or b) services which have already been provided but payment has not yet been received. They are classed as a liability.
What the balance sheet doesn’t do is show day-to-day transactions or the current profitability of the business. However, many of its figures relate to (or are affected by) Profit and Loss transactions on a given date.
The balance sheet will show:
- How solvent the business is;
- How liquid its assets are (i.e. how much is in the form of cash or can be easily converted into cash such as stocks and shares);
- How the business is financed;
- How much capital is being used.
With regard to point 4, the individual figures can change dramatically in a short space of time but the total net assets (assets less liabilities) would only change dramatically if the business was making large profits or losses. Any profits not paid out as dividends are shown in the retained profit column.
The balance sheet is comprised of the following:
Current Assets: The assets of a company are recorded as debits (a good thing) which are expected to be converted into cash, inventory and accounts receivable within 12 months of the balance sheet date. They are also termed liquid assets but whatever they are called their value can fluctuate from day to day. They show the following:
- Bank Balance
- Service Charge Debtors (money owed by leaseholders)
- Other Debtors (money owed from elsewhere such as trade debtors. These are suppliers that give a grace period in which to pay after services have been provided). The amount that goes on the balance sheet for trade debtors is the sum of all unpaid customer invoices at that point in time. A provision is usually made in the accounts of a firm to to offset uncontrollable accounts receivable (bad debts) as losses.
- Prepayments: These occur when a debt or installment payment is made before its official due date. It can be for the entire balance or for any upcoming payment that is paid in advance of the date for which the borrower is contractually required to pay it.
* These figures are added together*
- Trade Creditors
- Service Charges Paid in Advance
- Short term loans from an RMC, overdrafts or other finance which won’t appear on the Profit and Loss sheet
- Other Creditors
*These are all added together with the Current Liabilities subtracted from the Current Assets*
Income and Expenditure Account
Note: The balance sheet should also include any statements and signatures by the landlord or agent required by the lease. If there is no such requirement, it is good practice for the landlord or agent, (as applicable), to sign the balance sheet to confirm approval of the accounts. There is no statutory requirement as to the form or content of the balance sheet.