The Balance Sheet
In a set of annual accounts, the balance sheet (or statement of financial position) shows the value of a company’s assets and monies against what it owes externally to give an indication of how strong the business’ financial position is. Once you receive your annual accounts from your accountant for review there may be jargon that you are unsure of. This article will explain the assets and liabilities that can be found on the Balance Sheet and give examples of what you will likely see here.
An asset is something that holds a monetary value for the business. These can be classed as non-current tangible assets, intangible assets and current tangible assets.
Non-current tangible assets are typically items that have a physical form and would be made up of your plant and machinery, fixtures and fittings, motor vehicles and IT equipment which will have an expected useful lifetime of several years.
Intangible assets do not have physical forms themselves. These include trademarks, patents and blueprints, copyrights, franchise names, domain names and goodwill. These can be considered intellectual property and are difficult to place a value on as the company brand faces uncertainty of in the future. Intangible assets are brought in with the intention to be held for the long-term.
Current tangible assets would be any bank accounts, cash or inventory held and are usually sold within a year. Some accounts will show the current tangible assets beneath the tangible non-current assets and intangible assets.
A liability is money that is owed to someone outside of the company and these are segregated in to current and non-current liabilities.
A current liability is short-term and expected to be repaid within a year’s time. These liabilities can include short-term loans, trade creditors paid for products and services after the year end or remain unpaid, or even credit card payments due to be made. As VAT, PAYE and Corporation Tax are due to be paid within a year, they will often be listed separately in this category.
Non-current liabilities take longer than a year to be repaid. Long term loans are common here; bank loans and hire purchase assets.
Below the calculation of the business position is the amount of money paid for by shareholders for the shares in the company and the figure from the profit and loss account, and the total should match the calculation from the assets less the liabilities. Any positive figure is an indication of monies available to be taken as dividends. The figure should never be a negative; if this is the case then it should be reviewed and to see why the business would struggle to pay off its loans. Unless you have a limited company, you are not required to produce a set of accounts, although it is useful to know where the figures on your tax return come from. The accounts can also be given to investors or people interested in the trading financial growth who will review the figures.Tags:
annual accounts, jargon, balance sheet, assets, liabilities