Understanding balance sheet would give you clues how to improve and do better in managing your business affairs. Universally, a balance sheet is a standard document that summarize your company’s assets and liabilities.
Companies incorporated in the United Kingdom must follow the applicable accounting standards when preparing a balance sheet as part of the company accounts.
Accountants can tell you a story of your business affairs based on your balance sheet. How much corporation tax to pay and where to sign on your company accounts are the primary reasons you hire an accountant. Don’t stop here, your accountant can do more for you. Ask questions.
There are benefits to understand figures presented in your balance sheet, Firstly, you would need to learn the terminology used in that financial document. In the accounting world, balance sheet is a statement of your business assets and liabilities at the end of your company’s financial year.
The terminology used in a balance sheet is explained below.
Money held in hand including coins and currency. Sometime, they call it petty cash. Cash also money available in your company’s bank accounts. This excludes the overdraft facility you can used and draw down loans agreed.
Amounts not yet collected from your customers or amount outstanding from credit sales. In other words, what your customers still owe you.
Payment in advance that cover subsequent financial year. For instance, office rent paid in advance.
Value of products hold in stock by your company. The stock value is normally made up of purchases cost, production costs or net releasable value of the products.
Fixed assets (Property, Plant and Equipment)
Amounts of costs invested in long life, tangible, productive, operating assets. People often referred this type of investment as capital expenditure.
Amounts owing to suppliers for unpaid bills and invoices.
Money owed to HM Revenue and Customs for PAYE, VAT and corporation tax is presented under this heading. This sometime include directors’ loans to the business.
Commonly, this include invoices issued after your year end but for services rendered during the year. For example, accountancy fee and auditor fee.
Overdrafts and loans
Amounts borrowed on interest-bearing liabilities from bank and financial institution. For instance, a short term loan for working capital to keep your business going.
Called up share Capital
Amounts of capital invested in the business by owners (shareholders). Usually, a private limited company can have share as little as £1.
Retained earnings or reserves
Cumulative profits not yet distribute to shareholders. Generally, you can only distribute your profits through dividend after your corporation tax. Correspondingly, if you have insufficient profit after corporation tax then you cannot declare a dividend.
Small, medium sized and large companies
The above is a simple set of balance sheet format that many small limited company would have. They are more complex balance sheet for medium sized and larger companies.
Dormant company balance sheet
A balance sheet for a dormant company is even more simple. A dormant account literally only have share capital information on the document. For example, the called up share capital and issued share capital.