The balance sheet is a snapshot of the financial situation of the firm at a given moment in time.
On one side of the balance sheet, the company details its assets while on the other side it shows its liabilities. Both numbers should equal (or balance). Here is a hypothetical example of a balance sheet for Tom Smith Widgets, a fictitious company.
TABLE 1: TOM SMITH WIDGETS PTY LTD BALANCE SHEET.
As you can see the net assets in the top half of $330,000 match the capital employed in the bottom half of $330,000.
ABOUT THE BALANCE SHEET:
- The fixed assets are the assets that will last for more than a year. This might include buildings and machinery. It is these assets on which depreciation is charged in the profit and loss account.
- The current assets are made up of stocks, (goods not yet sold) debtors (those who have yet to pay the business for supplies/goods, etc. they have purchased) and cash and are assets that can be realised (sold) relatively quickly – certainly in less than a year.
- Stock includes stocks or raw materials, any work-in-progress and also any stocks of finished goods that are waiting to be sold.
- Debtors are people or firms that owe money to the company. The company wants to ensure that it collects these debts as promptly as possible to ensure a good cash flow through the business.
- Current liabilities are short-term liabilities. That is, they are money that is owed by the firm to someone else. A large part of this is often creditors (suppliers who are owed money), but it may also include overdrafts or short-term loans.
- Creditors are firms or people who the business owes money to.
- Long-term liabilities include money that is owed to someone else or another firm, but that is not due to be repaid for more than a year. This may include longer-term loans from banks or other financial institutions.
- Share capital is the capital that was raised when the shares in the business were originally sold.
- Retained profits are the total level of profit that has been kept in the business over the years and not paid out to the shareholders. Each year this will increase by the amount of the retained profit in the profit and loss account.
READ: More about Pricing Strategy and Business Planning.