1. What is a balance sheet?
2. Are balance sheets compulsory?
3. Why prepare a balance sheet?
4. What are the components of a balance sheet?
5. Debt, equity and liquidity ratios
6. Working capital
7. Example of a balance sheet

What is a balance sheet?

The balance sheet provides a good picture of the financial health of a business and is a tool used to evaluate a business's liquidity. It helps a small business owner identify trends and quickly grasp the financial strength and capabilities of their business.

The balance sheet is the financial statement used to report on the financial position of the business to the owner and other stakeholders such as banks and investors.

The balance sheet is a statement of what a business owns (assets) and owes (liabilities), and the value of the owner's equity (or net worth of the business) at a specific point in time. The balance sheet is also known as a statement of financial position because it shows a summary of the business’s financial position at a particular point in time.

The difference between the assets and liabilities is known as owner’s equity. The balance sheet is so named because the equity must equal assets minus liabilities.

Are balance sheets compulsory?

Sole traders and partnerships are not required to prepare and lodge a balance sheet with their annual tax return.

All public companies and large proprietary companies are required by law to prepare a balance sheet as part of their formal annual financial report that complies with Australian Accounting Standards

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Why prepare a balance sheet?

A balance sheet enables you to:

• quickly see the financial strengths and capabilities of your business;
• review the level of assets, debt and working capital of your business;
• compare the increase or decrease in value of your business over time;
• see the relative liquidity of your business;
• analyse your ability to pay all short-term and long-term debts as they come due; and
• review the composition of assets and liabilities, the relative proportions of debt and equity financing and the amount of retained earnings.

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What's next...

• Discover the essential components of a balance sheet
• View our example balance sheet
• Analyse your accounts using the debt to equity ratio

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