What is a Simple Balance Sheet?
A balance sheet is a simple financial statement that reflects the value of a business or organisation. It does this by calculating the total overall value of the assets held by the company, and then subtracting any liabilities and shareholder equity from that total.
Why you might need a simple balance sheet
The reasons for creating a simple balance sheet are that it provides a high-impact snapshot of the performance of a business at any given time. Once it’s been created, the balance sheet can then be consulted by key personnel within the organisation, and provide information for individuals or institutions thinking of investing in the business. An accurate, simple balance sheet provides a basic guide to how well the business is being run and can inform future planning.
The equation used for a simple balance sheet
The majority of simple balance sheets are created using the following basic equation:
Assets = Liabilities +Shareholders’ Equity
The three parts of this simple balance sheet example can be broken down as follows:
Assets – the items and resources owned by the company that have value and could be liquidated and turned into cash.
Assets can also be broken down into current assets and non-current assets. Current assets are those that the business will expect to convert to actual cash within the next 12 months. This could also include cash itself and cash equivalents, as well as accounts receivable, inventory, prepaid expenses and market securities.
Non-current assets are longer-term investments that won’t be converted into cash within 12 months, such as equipment and machinery, land, intellectual property and trademarks.
Liabilities – this covers any amount which the business owes to a debtor. These might include debt payments, rent and other bills, taxes, cash owed to suppliers and payroll expenses.
As with assets, liabilities can be divided into current and non-current. Current liabilities are usually those which fall due within 12, such as accounts that are payable and other expenses.
Non-current liabilities are those that aren’t due to be repaid within a year. These will include longer-term commitments such as loans, leases and bonds payable.
Shareholders’ equity – this is a reference to the net worth of a company in the form of the amount that would be left if the assets were sold and converted into cash and all liabilities paid.
The key to any simple balance sheet is that the figures should – as the name suggests – balance. Assets must be equal to the liabilities plus the shareholders’ equity, so the shareholders’ equity will always equal the assets minus the liabilities.
What if the balance sheet doesn’t balance?
If the completed simple balance sheet doesn’t balance then it means a mistake has been made. The details of the mistake could be anything from incomplete data being used, to correct and complete data being entered incorrectly. It could also be caused by a miscalculation, so a simple balance sheet that doesn’t balance needs to be recalculated throughout to find the error.
Creating a simple balance sheet
The creation of a simple balance sheet can be broken down into three basic steps:
Choose the reporting date and period – the majority of businesses prepare accounts on a quarterly basis, and the specific reporting date is generally the last day of the quarter or quarters included when detailing the assets.
Identify the assets – these will be listed as individual items and then the total pulled together as current and noncurrent assets.
Identify the liabilities – these need to be detailed individually and then the total pulled together as current and non-current liabilities.
We can help
Creating a balance sheet will highlight the condition of your business, and that condition will be improved if you work with a payment partner like GoCardless. We keep things as simple as possible and this includes the more complex aspects such as dealing with ad hoc payments or recurring payments.