We always tell our clients that they should be able to read, understand and interpret their financial reports. But how easy is this for someone not in the finance industry? In this article, we break down the balance sheet into its basic components and also look at how they work together.
Assets
One of the most important aspects of your balance sheet is your business Assets. Assets are the things the business ‘owns’. This includes your bank accounts, petty cash, undeposited funds, trade debtors, deposits paid, equipment, furniture and vehicles. They are divided into two categories:
Current Assets:
These are short term assets that will be accessed in the next 12 months. They include:
• bank accounts & petty cash or the money you have available at hand.
• Trade debtors is the total your clients owe to you also known as your Accounts Receivable.
• Deposits Paid will usually include things like your rental deposit, electricity or services deposits, equipment bonds or other deposits. These are items that someone else is holding for you, but that will be refunded to you and are therefore an asset.
• GST Paid is total you have paid on your bills & expenses and is also a current asset.
Non-Current Assets:
Fixed assets or Non-Current Assets are long- term assets such as:
• Motor Vehicles,
• Office furniture or
• Plant and Equipment that the business will use over many years.
These are generally the items you’ve purchased that aren’t immediately claimable in a year. For each category of fixed asset, it will show on your Balance Sheet as two line items – the original cost on one line, and the depreciation claimed to date as a negative underneath it. The total of these is how much is left to claim, and should be roughly the value of the item as it ages.
Liabilities
Liabilities are the things your business ‘owes’. This will include credit cards, trade creditors, GST owed, PAYG owed, Superannuation owed, income tax owed, business loans and director loans.
Current Liabilities:
These are short term liabilities that will usually be paid within the next 12 months. They include:
• Credit cards
• Trade creditors are the total you owe to your suppliers also known as Accounts Payable.
• GST Collected is the total of the amounts you have included on invoices to your clients. The total GST you pay is based on what you collect minus what you have already paid.
• ATO accounts may also be included here if you have outstanding BAS debts that weren’t paid at the time they were due.
• PAYG Withholding Payable – the tax you have taken out of your employees wages
• Superannuation Payable – the super you have calculated on your employees’ wages.
• Income Tax owed – if you have income tax owing from previous years’ submissions it will show here, often if you’re prepaying your tax this figure will show as a negative amount meaning that you have paid a liability that hasn’t yet been incurred.
Long-term Liabilities:
These are often mortgages, investor or director loans, used to establish or grow your business and which will be paid back as the business grows and is more profitable.
Net Assets
In bookkeeping we refer to Net Assets as the total Assets amount less the total Liabilities amount, and is an indication of where your business stands. Does it own more than it owes? Or does it owe more than it owns? Ideally you should own more than you owe, ie the amount should be a positive number. If it’s a negative number this is an indication that something is not right. It could simply indicate you are not up to date, or that some data entry has been done incorrectly. However it is also a warning sign that something may not be right with your business; either way it indicates that you should review your financial situation in more detail.
Equity
The equity is effectively the business ‘worth’. Retained profits are your previous year’s profits. Current earnings are your current net profit and should match exactly the very last figure on your Profit and Loss statement. If it doesn’t, your accounts are not reconciling correctly and it will need to be investigated.