Become the Master of Your Business Balance Sheet

What’s a balance sheet? A balance sheet can be described as a financial report which shows the position of a business at a given point in time, including its assets, liabilities and its total or net worth. Assets are the business’s economic resources, its liabilities are its debts or obligations and its total or net worth are its assets minus its liabilities.

It’s advantageous for business managers and owners to learn how to master a balance sheet because they illustrate how strong or weak their current financial position is. This helps them to make discerning decisions about their business.

Dos and don’ts to mastering a balance sheet

Getting balance sheets to balance and stay balanced often proves quite tricky indeed, but it is however very advantageous for business owners and managers to learn how to balance their balance sheets and keep them that way.

Dos’.

  1. Make sure the line items in the balance sheet are linked to the other areas of the model.

  2. Finalise your balance sheet once you’ve reached the end of the modelling process.

  3. Create a forecast balance sheet that’s aligned with your model.

Don’ts’.

  1. Never enter hard-coded numbers.

  2. Don’t attempt to balance the sheet before the model has neared completion.

  3. Avoid structural changes to the balance sheet.

Using the double entry system to master a balance sheet

The double entry bookkeeping system has been used for a long time and to great effect. It’s an excellent tool that can be used to keep your balance sheet in order and it’s highly recommendable that you utilise this system because most businesses do and for a very good reason, because it works and works well. It should be mentioned that like all systems the double entry bookkeeping system is not infallible, for as a human (you!) is entering the information there is always the possibility that the wrong ledger account could have been debited or credited, or alternatively, the entries completely reversed.

Taxation and balance sheet concerns

In addition to ensuring that their balance sheet lives up to its name, businesses also have to concern themselves with taxation. Whilst individuals can quite easily calculate how much their tax contributions, along with National Insurance contributions, will be by utilising practical online tools like the handy UK tax calculator that many financial websites make available for free, business entities are in a different situation altogether, especially where their balance sheets are concerned as they have deferred tax assets and liabilities to deal with.

  • A deferred tax asset generally arises in situations where tax relief has been provided after expenses have been deducted for accounting purposes.

  • A deferred tax liability generally arises in situations where tax relief has been provided before or in advance of an accounting expense, or alternatively, where income is accrued but not taxed until after it’s been received.

Preparing a balance sheet in three easy steps

Firstly calculate your current assets. These are assets that can be turned into cash within one year and include cash, accounts receivable, inventory, prepaid expenses and supplies. Work out the value of fixed assets and list any intangible assets. Add these assets together and you have your total assets.

Secondly calculate your current liabilities. These are debts due within one year and include accounts payable and long-term notes. List your long-term liabilities, add these to your current liabilities and you have your total liabilities.

Thirdly, prepare a Statement of Retained Earnings. This reconciles the beginning and ending balance for the yearly operating cycle.

Your balance sheet should read: Assets = Liabilities + Owner’s Equity

About the Author:

Money Vista is a financial planning tool from the Royal London Group. It features a pension calculator among others things for helping people manage their money better.

 

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Friday, 16 November 2018
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