The Balance Sheet can be a window on a business that clarifies and explains  or a thick curtain of obscurity that only achieves confusion.

In truth, The Balance Sheet provides a snapshot of the business at a particular moment in time. It shows what the business owns (assets) balanced against what the business owes (liabilities) and these amounts must be equal as a business is merely a device to hold value and carry out a purpose on behalf of others.

The figures for the Balance Sheet are taken from the Trial Balance which is a simple listing of all the debits and credits in the nominal ( general) ledger which is extracted regularly to ensure the debits and credits are equal in the ledger. The figures used in the Balance Sheet are those for assets and liabilities. Assets will be shown on the Trial Balance and Nominal Ledger as debits and liabilities will be shown as credits. Balance Sheets are normally compiled once a month or quarterly for management information purposes and almost always annually as a legal requirement.

Examples of asset accounts include bank, premises, equipment, machinery etc. and liability accounts include loans, creditors, etc. Take one from the other and you have the net value of the business that is owed to the shareholders or partners who are effectively the balancing figure. Compare the net value this month with last month and you have a calculation of profit (or loss). If the business is worth more now than before, it's in profit, if less, then you've been making a loss. Thinking of selling your business? The net value you have just calculated gives you an idea of its' price.

Ratios can be calculated that compare, for example, the net profit from the Profit and Loss Account as a percentage against the net assets of the business in the Balance Sheet to calculate the return on capital employed. This enables the level of success the business has achieved as an investment to be compared with other investment opportunities.

Bye for now!

     Rob