What is a balance sheet? Definition and examples
The Balance Sheet is defined as a document designed to illustrate the state of your business finances at a specific moment in time, and demonstrate its financial stability to Bank Managers and the like.
A Balance Sheet will outline your current liabilities alongside your assets to provide a clear indication of the current value of your business, and as such can prove a useful tool, not just in terms of attracting investment but also in shaping your broader freelancing strategy.
As a Limited Company freelancer, you’ll be required to construct a balance sheet as part of your Annual Accounts – although a decent accountant or some financial software will usually do this for you.
If you’re a Sole Trader you’ll be spared the prospect of this, but from time to time it can still be worthwhile putting one together to help you determine how solvent your business is.
The problem comes with actually understanding the things listed on your Balance Sheet.
Here are a few of the terms you might encounter.
Fixed & Tangible Assets
Assets come in two forms in accounting parlance; a fixed asset something that is just that – fixed -and isn’t going anywhere any time soon, like property and vehicles.
Meanwhile Tangible Assets are physical things that will pass in and out of the business relatively freely – like stock or inventory.
Trade or Other Debtors
Debtors are those folk who owe you money and in the case of Trade Debtors, this will be any outstanding invoices.
Other Debtors refers to the cash your business is owed that isn’t through sales (e.g. money you’ve loaned, or a refund you’re waiting to receive).
Cash at hand and in bank
Cash at hand means physical cash your business has in its possession – the notes and coins.
The second, ‘cash in bank’ refers to the collective balances in whatever business related bank accounts you have.
Together they’ll give you the total amount of available cash you have.
Creditors falling within / after one year
Creditors are people who you owe money to.
Any payments to creditors must be recorded in the financial year you make the payment, so they are split into short term creditors (your suppliers, for instance) and those you expect to repay more than a year in the future (a loan from your bank, for example).
All this information will need to be split into different financial years and segmented by date, based upon when the transaction occurred – bear that in mind when looking at your Balance Sheet.
Through this examination of the value of your assets and your current liabilities, you’ll be able to determine the net value of your assets and that is what a balance sheet provides – a statement of your financial position at a specific time, illustrating how much cash you currently have.
You can also take a look at our freelance accounting glossary for more explanations of business terms.