Understanding balance sheets

A balance sheet is a summary of all of your business assets (what the business owns) and liabilities (what the business owes). At any particular moment, it shows you how much money you would have left over if you sold all your assets and paid off all your debts (i.e. it also shows 'owner's equity').

What's in a balance sheet?

A balance sheet is also called a 'statement of financial position' because it provides a snapshot of your assets and liabilities - and therefore net worth - at a single point in time (unlike other financial statements, such as profit and loss reports, which give you information about your business over a period of time).

There are 3 different sections in a balance sheet, represented by the following formula:

Assets – liabilities = owner's equity

It is called a balance sheet because, at any given moment, each side of this equation must 'balance' out.

Assets

Current assets

Current assets are assets your business plans to keep for a short period of time, often less than 12 months. They include:

  • cash at bank
  • short-term investments
  • stock
  • trade debtors (people who owe the business money)
  • petty cash.

Fixed assets

Fixed assets, also called non-current or capital assets, are assets your business plans to keep, including:

  • building improvements
  • plant and equipment
  • motor vehicles
  • office equipment.

Intangible assets

Intangible assets are assets you can't touch. They include any or all of the following:

  • intellectual property - knowledge, information or processes that set your business apart from others
  • trademarks and patents - formally registered concepts that bring value to your business
  • goodwill - the amount you pay for the reputation and performance of a business if you buy one, sometimes called 'business value'.

Learn more about how to value business assets.

Liabilities

Short-term liabilities

Short-term liabilities are usually those items you expect to pay for or could be expected to pay for during the next 12 months. They may include:

  • overdrafts that must be settled, or overdraft charges
  • short-term loans
  • creditors, including trade creditors.

Long-term liabilities

In accounting terms, long-term liabilities are debts not payable within 1 year of the balance sheet date. They include:

  • long-term loans
  • secured bills
  • director's loans (to the business)
  • residual value on leases due in more than 12 months.

Owner's equity

Owner's equity - also called shareholders' equity - is the residual portion of a business that belongs to the owner/s after deducting total liabilities from total assets.

Owner's equity = assets – liabilities

The amount of equity available depends on the success or failure of the business.

Depreciation

Depreciation is an important concept to consider when interpreting your balance sheet. Every time your business uses a fixed asset - such as office equipment or a vehicle - some of its value is lost.

Australian tax law requires you to spread the cost of assets over the years in which you use them (depreciation).

Use the decline in value calculator to calculate depreciation of an asset over time.

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