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Understanding Balance Sheets - Everything YOU Need to Know


A balance sheet is a 'financial snapshot' at a specific moment in time for a business. It looks at all the assets (something a business owns) and all the liabilities (something the business owes). It is possible a balance sheet will appear in a Business Studies A2 exam which makes it important you understand a balance sheet. This article will tell you everything you need to know about Balance Sheets which includes fixed assets or non-current assets, tangible assets, intangible assets, current assets, inventories, debtors/receivables, current liabilities, long term loans/non current liabilities, equity and equations of a balance sheet. Feel free to skip to the parts of the article that are most relevant to you.


Before we look at balance sheets, you should know there are many different types of Assets and Liabilities.

Assets (things a Business own)


Fixed Assets or Non-Current Assets
This are things that are not planned to be sold by the business within a year. They are things needed for trade and are things that the business invest in. Examples include:
  • Tangible Non-Current Assets - These are things that the business own that have physical existence. Examples of tangible assets include buildings, equipment and vehicles.
  • Intangible Non-Current Assets - The exact opposite to tangible assets, there are assets the business have which have not got a physical form nor give the business definite financial rights. Examples include goodwill (reputation), brand and intellectual properties such as copyrights and patents.
Current Assets
These are the things of value within the trading cycle of a business. Examples include:

  • Stock or Inventories - This is a current as as it is something 'of value within the trading cycle of a business'
  • Debtors of Receivables - These are the people that owe money to the business. They can also be know also as creditors.
  • Cash/Bank.
Liabilities (things a Business owe)

Current Liabilities 
These are the short term debts to be paid by the business. Examples include:
  • Payables of Creditors - This in considered the most important current liabilities because if the business find it difficult to pay suppliers for their supplies, the suppliers may drop out or decrease the credit given to the business.
  • Overdraft or Short term loans - These are for loans that are under a year. These are short sources of finance.
  • Tax due.
  • Dividends due - this is the money the business need to give to shareholders who bought shares in the business. This is if they are a public limited company.
Non Current Liabilities
These are the long term loans to be paid by the business. Examples include:
  • Mortgages.
  • Bank loans.
Equity
There is a third type of liability which is equity. This can either be:
  • Money attributable to the owners.
  • Shares.
  • Retained profit/reserves.
Assets = Liabilities
An important equation in a balance sheet is that all the money the business owns should equal all the money the business owes:
Non-current assets + current assets = current liabilities + non-current liabilities + equity
This can be be shortened to:
NCA + (CA - CL) - NCL = Equity
Which again can be shorted to:
Net assets = Equity
because Non-current assets + (current assets - current liabilities) - non-current liabilities can also be called Net Assets.

About Will Green

A student in England studying Automotive Engineering with Motorsport, Will created Ask Will Online back in 2010 to help students revise and bloggers make money. You can follow AskWillOnline via @AskWillOnline.

2 comments so far:

  1. Your article is incredibly informative! I really loved your blog and the details mentioned in it.

    ReplyDelete