Balance sheet

What it means

The balance sheet states what the company owns and how it is funded as at one particular day. Assets on one side, liabilities and equity on the other, and the two always match.

Unlike the profit and loss statement, which describes a period, the balance sheet is a snapshot. So it is compared with the same date a year earlier, not with an average.

The balance sheet is not the same as the trial balance it is built from: the trial balance lists opening balances, movements and closing balances for every account, while the balance sheet groups them into the lines of the prescribed statement. One balance sheet line often sums dozens of accounts, and the detail behind a figure sits in the trial balance.

How it works in practice

Read it in three steps: the structure of assets (how much sits in fixed assets, in stock and receivables, in cash), the structure of funding (how much is own and how much borrowed), and whether the maturities match - long-term assets should not be funded by short-term money.

With the profit and loss statement and the notes it makes up the annual accounts. Banks, investors and partners read it first: it speaks to stability rather than performance.

Before it is drawn up we check that every figure has support outside the books: the bank balance agrees to the statement, receivables and payables to partners’ confirmations, stock and fixed assets to the result of the stocktake. A balance sheet whose items cannot be backed up this way will not stand up to an auditor or a bank review.

What to watch out for

The balance sheet shows book value, not market value: a building bought in 2008 sits at cost less depreciation. And negative equity is the gravest signal it can carry.

Another warning sign is a large cash-in-hand balance or a growing receivable from a member: on the balance sheet they look like assets, but often they are money taken out without a document. Neither a bank nor a buyer treats them as real assets and they draw questions in any inspection; they should be settled in time, by repayment or set-off, not rolled into the next year.