How to Read A Balance Sheet

In this blog we will look at the financial statement known as the balance sheet (or statement of financial position). Unlike the profit and loss account, which shows income and expenses over a period (usually a year), the balance sheet is a snapshot of the business at a single point in time.

It brings together several sections that show what the business owns, what it owes, and how it is financed.​​

Fixed assets (non‑current assets)

Fixed (non‑current) assets are long‑term assets that the business uses to generate income, such as vehicles, machinery, equipment or buildings. Intangible assets such as goodwill, trademarks or software can also appear here, usually in a separate intangible assets section, while the physical items are shown as tangible fixed assets.​​

In most UK accounts, the figure shown is the original cost of the asset less accumulated depreciation (and amortisation for some intangibles). This gives you the carrying amount in the accounts, which is not the same as market value but does show how much of the asset’s cost remains to be written off.

Further reading:
https://www.gov.uk/government/publications/life-of-a-company-annual-requirements/life-of-a-company-part-1-accounts​

What are current assets?

Current assets are items that can reasonably be turned into cash within the next 12 months. Typical examples include:

• Trade debtors/receivables (amounts customers owe you)
• Stock or inventory
• Bank balances
• Cash in hand​​

These are often listed from least liquid to most liquid or vice versa. A healthy balance sheet will usually have a solid level of current assets, with a good proportion in cash and receivables that can be collected quickly. If most of the value sits in slow‑moving stock or overdue debtors, it can indicate that too much money is tied up rather than available to run the business.​​

What are current liabilities?

Current liabilities are amounts the business expects to pay within the next 12 months. These might include:

• Trade creditors/payables (suppliers you owe)
• VAT, PAYE and corporation tax due
• Bank overdrafts
• Short‑term parts of loans
• Directors’ loan balances that are repayable on demand in a company

What really matters is how current liabilities compare to current assets (your working capital position) and whether the business can comfortably meet its short‑term obligations.​​

Overview of small‑company balance sheets at Companies House:
https://www.gov.uk/government/publications/life-of-a-company-annual-requirements/life-of-a-company-part-1-accounts​

Net current assets (working capital)

Net current assets (also called working capital) are calculated as:

Current assets – Current liabilities

This shows how much funding is tied up in the short‑term operations of the business and how much is available after paying imminent bills. A positive figure suggests the business should be able to cover its short‑term liabilities, while a negative figure (net current liabilities) is a warning sign and should be investigated, as it can mean the business is relying on overdrafts, extended credit or other support to meet everyday costs.​​

Some business models do operate with structurally negative working capital (for example, where customers pay up front and suppliers are paid later), so the sector context matters.​​

Non‑current liabilities (fixed liabilities)

Non‑current liabilities are amounts that fall due more than 12 months after the balance sheet date. Typical examples include:

• Bank loans and other long‑term borrowings
• Mortgages on business premises
• Long‑term director loans due in more than one year

If you are assessing a business, it is worth looking beyond the headline figure to the loan terms, interest rates, repayment schedule and any security given over assets.​

Net assets (or net liabilities)

Net assets are calculated as:

Total assets – Total liabilities

This figure represents the accounting value of the business and, in company accounts, will equal total equity. A positive net assets figure generally indicates that assets exceed liabilities; a negative figure is described as net liabilities and can point to accumulated losses or heavy borrowing.

A negative net assets position does not automatically mean the business will fail, but it is something lenders, investors and directors should understand and monitor.​​

Companies House help on balance sheet layout:
https://ewf.companieshouse.gov.uk/help/en/stdwf/microAccountsHelp.html​

Equity / capital (how the business is financed)

The final section of the balance sheet shows how the net assets are financed, which looks slightly different for sole traders/partnerships compared to limited companies.

Sole traders and partnerships

For unincorporated businesses, this section is usually called capital or partners’ capital. It typically includes:

• Opening capital (money or assets the owner(s) have invested)
• Plus: profit for the year
• Less: drawings (money or assets taken out by the owner for personal use)

Drawings and capital movements are balance sheet items, not expenses in the profit and loss. A large drawings balance relative to profits can explain why the capital (equity) figure is low or negative even if the business has generated a surplus in some years.​

Limited companies

For a company, this section is usually labelled equity or capital and reserves. It might include:

• Share capital (what shareholders have invested in shares)
• Share premium and other reserves (if applicable)
• Retained earnings (accumulated profits or losses not yet paid out as dividends)
• Sometimes a separate line for other reserves created by revaluations or specific transactions

Directors’ loan accounts (money owed by the company to directors or vice versa) normally appear in the liabilities section (current or non‑current), not in equity, although they are an important part of understanding how the business is funded day to day.

In both cases, the total equity/capital figure will match the net assets figure. If equity is negative, it is often because:​

• The business has made significant losses over time, or
• Owners/shareholders have withdrawn more than the sustainable level of profit (through drawings or dividends).

A strong positive equity position, mainly made up of accumulated profits, usually indicates that the business has been consistently profitable and retains enough capital to fund its operations and future growth.

If you require any further advice or assistance on the above, or with preparation of such documents, please do not hesitate to contact us.