The Balance Sheet

The Balance Sheet is one of the two key financial statements that businesses, organisations and other corporate entities must produce on at least a yearly basis.

snapshot of a Balance Sheet

Download example Balance Sheet

The purpose of the Balance Sheet is to tell the reader the value of the business or organisation. Although typically a balance sheet contains many figures, the figure labeled "Net Assets" is the one which tells the value of the organisation.

"Net Assets" can be arrived at quite simply by adding up the value of all the Assets of the business entity and then taking away all the liabilities that exist. See illustration on right.

By law, business entities must publish a Balance Sheet on a once yearly basis that has been "audited". This means that a qualified accountant has checked the accuracy and validity of all the figures on the balance sheet and makes a statement that, in their professional opinion, it represents a "True and Fair View" of the entities financial position. The qualified account must be independent and external to the business entity, to prevent a conflict of interest.

In producing an audited Balance Sheet, the external accountant (auditor) checks the accounting and financial management processes within the business are running properly and that all the figures reported in the Balance Sheet are accurate.

As well as telling the reader the total worth of the organisation / business (the "net assets" figure), the Balance Sheet yields important information about whether the organisation is in good financial health.

In the example Balance Sheet provided, the organisation has Current Assets of $9,000 and Current Liabilities (bills to be paid) of $14,000. The difference between Current Assets and Current Liabilities is an expression of "Working Capital". If the Working Capital is negative (that is Current Liabilities are greater than Current Assets) then there is cause for concern.

In fact we can see in the example, that the organisations has $14,000 of bills to pay but only $5,000 in the bank. Therefore, this organisation is experiencing a "Liquidity" problem. If the problem is only temporary i.e. a sizable amount of money is coming to the business in the near future, then the entity is not under threat. It can delay paying its bills.

If this situation continues and the organisation cannot pay its bills when they fall due, it may be in serious difficulty and may even become bankrupt.

So the Balance Sheet is an important document that describes the "financial health" of the organisation.

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