Purpose
There are various financial tools that help you manage an organisation. The balance sheet is one of them. It gives you the financial details of what your organisation owns (the assets) and what it owes (the liabilities). A balance sheet shows you where the money for your organisation comes from, and the way your organisation is using this money.
How To Use a Balance Sheet
When you compile a balance sheet, you include the following:
- Current assets. These are your short-term assets. Their value may change daily. Current assets include available cash; any stock; investments made over the short-term; money in bank accounts; money clients owe; and work currently taking place.
- Fixed assets. These are long-term assets. Some of them are physical; others are intangible. Physical fixed assets include land, buildings, machinery, fixtures, computers and vehicles. When you note down their value on the balance sheet, you must take account of depreciation where appropriate. Vehicles, for example, depreciate rapidly in value. Intangible fixed assets include rights to patents, domain names of websites, and long-term investments you cannot immediately access.
- Current liabilities. These are amounts of money the organisation owes and that it must pay within a year. They include taxes, National Insurance, and overdrafts.
- Long-term liabilities. These are the sums of money an organisation owes that it must pay after one year. Bank loans are a common example. Long-term liabilities are also capital, reserves and retained profits.
You can use the above data to help you manage your organisation. You can also present the balance sheet to shareholders, investors and creditors to give them an assessment of the value of your organisation at a particular moment. This is why balance sheets usually appear in the annual accounts of a limited company.
Limitations
You need to value assets accurately. If you make estimates, the balance sheet is not a true reflection of an organisation’s finances.
Even so, estimating the value of assets is sometimes the only practical course to take. You also need to estimate depreciation of items such as machinery by using an annual percentage. Such a percentage is an educated guess.
But such limitations are not as serious as they may at first appear. Because they apply to most businesses, estimates and depreciation percentages do not necessarily put you at a disadvantage.
A further issue to consider is the value of assets such as customer goodwill and worker loyalty. You cannot express these in monetary terms on a balance sheet. Instead, you should account for them within your organisation’s strategy.
Related Subjects
- Profit and Loss Statement. This has the details of an organisation’s income, expenses and profit. You place these over a period such as a quarter or a full financial year.
- Cash Flow Statement. This has information about an organisation’s cash flow related to investments, operating costs and financing. Again, you apply the statement to a particular time span.
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