Balance Sheets and Cash Flow

The “Balance Sheet”
The Balance Sheet is a statement of the wealth or financial position of your business at a given point in time. It is often known as a snapshot because it gives you a fairly clear picture of your business at any moment but it doesn’t show how the business arrived there or where it is going.

It lists your businesses assets and liabilities and the difference between the two will be the owner’s equity or what your net worth is. The accounting equation (assets = liabilities + owners equity) is the basis for the Balance Sheet.

The individual elements of a Balance Sheet will change from day to day and reflect the operation of the business. When your accountant is able to analyse your Balance Sheet, important information about your business and its trends can be revealed.

The other name for the Balance Sheet is the "Statement of Financial Position". This probably best explains this report in that it would reveal what the business's financial position is at any time. That is, it shows what the business owns and what it owes.

Details in a Typical Balance Sheet
A typical Balance Sheet will be composed of one section called assets and another called liabilities.

An asset is anything that the business owns and has monetary value. Assets are normally shown at their net realisable value so any appreciation in the value of the assets is not considered.

Assets can be split up further into three main groups.

  1. Current Assets
    These are assets which mature in less than one year. They include such items as cash, bank accounts, accounts receivable (debtors), inventory (stock), prepaid expenses, government securities, marketable securities and any other item that can be converted into cash within one year in the normal course of business.

  2. Fixed Assets
    These are assets that are acquired for long term use in the business. They include such things as land, plant, equipment, machinery, furniture, vehicles, fixtures, office equipment, leasehold improvements and any other items with an expected useful business life of longer than one year. That is, as opposed to items that wears out or is used up in less than a year from when they were purchased. Most assets are typically not for resale but are recorded in the Balance Sheet at their net cost less accumulated depreciation.

  3. Other Assets
    Other assets include intangible assets such as copyrights, patents, franchises and other intellectual property. Their value can be difficult to work out because they are intangible and often there is no ready market for this type of asset. Nevertheless, intangible assets have a very real value in the business and in some cases the intellectual property is its most valuable asset.


Liabilities are the amounts which the business owes to others. They may be claims that creditors have against the assets of the business in the way of loans or they may be funds which have been acquired for the business through loans or sale of property or services to the business on credit.

Liabilities can be broken up into 3 groups.

  1. Current Liabilities
    Current liabilities are those liabilities which generally have to be paid within one year and can consist of creditors, bank overdrafts, any accrued expenses such as wages or salary, tax payable, any current portion of long term debts, and any other obligations to creditors which are due within a twelve month period.

  2. Long term Liabilities
    Long term liabilities will consist of mortgages, long term bank loans, equipment loans, hire purchase and other obligations for money due that have a maturity longer than one year.

  3. Shareholders / Owners equity
    This is money that has been put into the business by the owners or shareholders for use by the business and amount to what their value in the business is worth. It can also be called net worth because it is the amount arrived at by deducting all the liabilities from the assets.

It sets out the equity and the investment by the owners or shareholders plus any profits or minus any losses that have been accumulated in the business. At any given time the assets of the business will equal the contributions by the creditors and owners.

This is illustrated in the following formula:

        Assets = Liabilities + Shareholders/Owners Net Worth

This formula is the basic premise of accounting. If a business owes more money to creditors than it possesses in its asset value then the net worth, or owner’s equity of the business will be a negative number.