A short guide to the Balance Sheet for Non-Financial Managers…
The Balance Sheet lists a company’s assets and liabilities. It is prepared at a single point in time – and is valid for only that specific date.
It gives a ‘snapshot’ of a business’ financial situation, and reveals where the company’s financing came from – and how those funds were used to buy the company’s assets.
This funding is also referred to as ‘Capital Employed’. Capital Employed comes from three places – profits, loans and shares.
More formally, these sources of finance are known as ‘liability accounts’, organised in terms of equity and loans. This means that on an overall level, Capital Employed equals Equity plus Loans.
As far as the Balance Sheet is concerned, money coming into the business is spent on a combination of Fixed Assets and Current Assets.
A Balance Sheet must always be ‘balanced’. This means that on the date it was put together, the business’ total assets must equal its total liabilities.
On a traditional Balance Sheet, assets and liabilities are kept totally separate from each other.
The ‘working capital’ approach to formatting the Balance Sheet offsets current liabilities against current assets, in order to separately identify working capital.
For many businesses, it helps to separate-out how the business is operated, from how it is financed. So the third way to approach laying-out the Balance Sheet is to use the ‘financial analysis’ format.
This approach clusters all account items relating to company finance on the capital side of the Balance Sheet.
From a financial perspective, a company’s performance is assessed both before and after financing. A number of ratios are used in both situations. Using the financial analysis format for the Balance Sheet makes them easier to calculate.
The figure on the Balance Sheet for Retained Profit is calculated by taking the Retained Profit figure from the P&L and adding it to profits retained from previous financial periods.
This then allows us to calculate the following: Retained Profit from P&L + Retained Profits from previous years + Share capital = Owners’ equity/Shareholders’ funds.
About Brightbolts…
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