Balance sheet

Definition

A balance sheet is one of the core financial statements. It sets out, at a single moment, everything a company owns (its assets), everything it owes (its liabilities), and the difference between the two — the shareholders' equity. It is governed by a simple identity: assets always equal liabilities plus equity. That is why it is said to balance.

In plain terms

If the profit-and-loss account is a film of how the year went, the balance sheet is a photograph of where the business stands today. On one side sit assets: cash, stock, money owed by customers (receivables), equipment and property. On the other sit liabilities: bank loans, supplier balances, tax due. Whatever is left after subtracting what you owe from what you own belongs to the shareholders. A growing equity figure usually signals a strengthening business.

Why it matters to your business

Lenders read your balance sheet to gauge resilience. They look at net working capital (short-term assets versus short-term liabilities) to judge whether you can meet day-to-day obligations, and at gearing to see how much debt you carry relative to equity. A healthy balance sheet improves your access to business finance and the terms you are offered. Keeping it tidy — chasing debtors, managing stock, retaining profit — directly affects your borrowing power.

• Shows whether you can meet short-term bills
• Reveals how heavily you rely on debt
• Central to a lender's affordability view

The three building blocks

Assets split into current (cash, stock, receivables — expected to convert to cash within a year) and non-current (property, plant, equipment held longer). Liabilities split the same way: current (due within a year, such as supplier balances and the next year of loan repayments) and non-current (longer-term borrowing). Equity is the residual — share capital plus accumulated retained profit. When you read a balance sheet, scan these three blocks and how they have moved since last period.