LESSON 15: A dissection of the commonest and most signi Articles

LESSON 15: A dissection of the commonest and most significant items in a typical Balance Sheet, and what they really tell you about your business

 What follows is an explanation of the amounts most frequently found in a Balance Sheet. The accounting and legal rules and concepts are many and complex, therefore what follows is a simplification. Despite that it provides a critically important explanation of how to read your Balance Sheet, what each line means, and how much you […]

15.1 Fixed Assets are a record of past costs, but this does not tell you what the assets are worth

 Fixed assets are things the business intends to keep and use long-term. They are most commonly physical things like cars, productive machinery, computers, desks and so on. They can also include costs of creating the environment in which the business is carried out – for example the costs of fitting out a shop. They do […]

15.2 Current assets in contrast are generally shown at their existing market values

 In contrast to fixed assets, current assets are under most circumstances shown at a true reflection of their value. For the most part current assets represent things that will be converted into money over the next few months. This information is critically important for running your business. On its own it is useful, but when […]

15.3 Current liabilities too are usually real cash values

 Current liabilities generally consist of amounts the business will have to pay within the next few months. They include most of the amounts the business is committed to at the date the accounts were produced. But they do not include things like future rentals of property. Like current assets, because they are amounts which for […]

15.4 ‘Net Current Assets’ can give you an inkling as to whether you will have sufficient cash in the weeks ahead

 Net Current Assets is simply the total of the current assets section less the total of the current liabilities section. Generally speaking it is usual for a healthy company to have more current assets than current liabilities. This gives some comfort that the business is likely to be able to pay its way in the […]

15.5 Long liabilities include most, but not all, of your long-term financial commitments

 Long liabilities are things that are payable by the business more than one year ahead. They are usually financing arrangements – that is loans, leases and hire purchase agreements. Note that it is quite likely that in a set of management accounts the preparer has not gone to the trouble of splitting each long loan […]

15.6 Balance Sheet Total (One)

 The Balance Sheet total is just the sum of all the various sections – it is fixed assets plus current assets less current liabilities less long liabilities. It shows the total of all the amounts the business owns less everything it owes to people other than the business owners. The Balance Sheet total can be […]

15.7 Capital and Reserves

 This bottom part of the Balance Sheet shows the amount the business owes to its owners. It may also be described under a variety of names, such as Owners Equity, Shareholders Equity and so on. Share capital Share capital will only ever be found in a company Balance Sheet. In your own company it is […]

15.8 Balance Sheet Total (Two)

 The crucially important point for you to appreciate is that the total shown here must equal the Balance Sheet Total already shown above. Totals are shown for both the upper and lower parts of the Balance Sheet so they can be compared. If they are different an error has been made somewhere when compiling the […]

15.9 What does it all mean?

 Now we come to a big question, and that is what does the Balance Sheet total actually mean? The surprising reality is that the total means very little. If we were to look at this question from the point of view of an investor then maybe we could say a bit more than that – […]