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Accounting

What is Balance Sheet?

A balance sheet shows what your company owns (assets), what it owes (liabilities), and the difference (equity) at a specific point in time.

Example

Assets: £50k cash + £20k equipment. Liabilities: £10k owed to suppliers. Equity: £60k (assets minus liabilities).

Key Dates

Prepared at year end as part of annual accounts

How Balance Sheet Works in Practice

The balance sheet is one of the two primary financial statements every UK limited company must prepare (the other being the Profit and Loss statement). While the P&L shows performance over a period, the balance sheet is a snapshot at a single point in time -- typically your accounting period end date. It answers the question: what does the company own, what does it owe, and what is it worth?

The fundamental equation of the balance sheet is: Assets = Liabilities + Equity. This must always balance (hence the name). Assets are what the company owns or is owed. Liabilities are what the company owes to others. Equity (also called shareholders' funds or net assets) is the residual value belonging to the shareholders, consisting of share capital plus accumulated retained profits.

Assets are split into fixed assets (things the company keeps for the long term, like equipment, vehicles, and property) and current assets (things that are expected to be converted to cash within a year, like bank balances, accounts receivable, and stock). Liabilities are similarly split into current liabilities (due within 12 months, like trade creditors and tax owing) and long-term liabilities (due after 12 months, like bank loans and finance leases).

For small companies filing with Companies House, the balance sheet is often the most detailed public information available. Small companies can file abbreviated accounts with reduced P&L information, but the balance sheet must always be included. Banks, suppliers, and potential customers often check your company's balance sheet on Companies House to assess its financial health before doing business with you.

Step by Step

The balance sheet is prepared at your accounting period end date by listing all assets and liabilities at their carrying values. Fixed assets are shown at cost minus accumulated depreciation. Current assets are shown at the lower of cost and net realisable value. Liabilities are shown at the amount owed.

The preparation process involves reconciling every balance sheet item: verifying bank balances match statements, confirming accounts receivable matches unpaid invoices, checking accounts payable against supplier statements, calculating tax owed, and updating depreciation on fixed assets. This is why year-end accounts preparation takes time.

Once prepared, the balance sheet is filed with Companies House as part of your annual accounts. For micro-entities (turnover under £632,000, assets under £316,000, under 10 employees), a simplified balance sheet format is permitted. Small companies (turnover under £10.2m) can also file with reduced disclosure. The balance sheet must be approved by the board and signed by a director.

Practical Tips

  • Check your balance sheet balances before filing -- if assets do not equal liabilities plus equity, there is a bookkeeping error that needs fixing
  • Monitor your director's loan account balance on the balance sheet -- if it is overdrawn at year end, Section 455 tax may apply
  • Keep your balance sheet tidy by writing off old balances (like ancient unpresented cheques or small unreconciled differences) before year end
  • Review the accounts receivable figure critically -- large balances might include invoices that will never be paid and should be written off as bad debt

Common Mistakes to Avoid

  • Forgetting that the balance sheet must always balance -- if it does not, there is an error somewhere in your bookkeeping
  • Not distinguishing between current and non-current items, which affects how lenders and investors assess your liquidity
  • Overlooking the director's loan account balance, which must appear on the balance sheet and can have tax implications
  • Confusing the balance sheet with the P&L -- the balance sheet is a snapshot at a point in time, not a summary of a period

Frequently Asked Questions

Does my small company need to file a balance sheet?

Yes. Every limited company must file a balance sheet with Companies House, regardless of size. Small companies can file with reduced disclosure (no P&L required), but the balance sheet is always mandatory.

What does negative equity on a balance sheet mean?

Negative equity (also called a balance sheet deficit) means the company's liabilities exceed its assets. This often occurs in early-stage companies that have accumulated losses. It does not necessarily mean the company is insolvent, but directors should monitor it closely.

How often should I review my balance sheet?

At minimum, annually as part of your year-end accounts. However, reviewing it quarterly gives much better visibility of your financial position. Key items to watch are cash balances, accounts receivable ageing, and whether the director's loan account is overdrawn.

What is working capital and how does it relate to the balance sheet?

Working capital is current assets minus current liabilities. It is calculated directly from the balance sheet and shows whether you have enough short-term resources to cover short-term obligations. Positive working capital means you can pay your bills; negative working capital is a warning sign.

Why does my balance sheet show a different profit figure to my P&L?

The balance sheet shows retained profits, which is the cumulative total of all past profits minus all dividends ever paid. The P&L shows just the current period's profit. The current year P&L profit gets added to the opening retained profits figure on the balance sheet.

Source: Companies House filing requirements for accounts: https://www.gov.uk/annual-accounts

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