Balance sheet

Also called Statement of financial position

A photograph of what the business owns and owes on one particular day.

What it means

A balance sheet lists assets (what the business owns or is owed), liabilities (what it owes) and the difference between them, which is the shareholders' or owner's equity.

It balances because every pound of asset was funded either by borrowing or by the owners, so the two sides always come to the same total. That is arithmetic, not a sign of health.

Why it matters

The profit and loss account tells you how the year went. The balance sheet tells you what state the business is actually in — whether it has more coming in than going out over the next twelve months, how much is tied up in stock and unpaid invoices, and how much of the business is funded by debt.

Lenders read it before they read anything else.

What it looks like in practice

Two quick reads. Current assets versus current liabilities: if what is due to you within a year is smaller than what you owe within a year, that is a problem worth understanding today. And retained earnings: negative reserves mean the company has lost more over its life than it has made.

What to watch out for

A director's loan account that is overdrawn. It sits on the balance sheet as an asset of the company and a debt owed by you personally, and it has tax consequences.

Asset values that are historical rather than real — old equipment carried at cost, or stock that will never sell at the price it is listed at.

Where to get proper advice

Your accountant will walk you through yours. The two ratios above are worth asking about explicitly, because they are rarely volunteered.