Learn how a Balance Sheet shows what a business owns, what it owes, and the owner’s interest in the business at a particular date.
What Is a Balance Sheet?
A Balance Sheet, also called a Statement of Financial Position, is a financial statement showing a business’s assets, liabilities and equity at a specific date.
Unlike a Profit and Loss Statement, which measures financial performance over a period, the Balance Sheet presents the financial position at one point in time.
The Accounting Equation
Every Balance Sheet is based on the accounting equation:
This equation reflects the double-entry bookkeeping system.
For example, if a business has £50,000 in assets and £20,000 in liabilities, its equity is:
£50,000 − £20,000 = £30,000.
What Are Assets?
Assets are economic resources controlled by a business as a result of past events and from which future economic benefits are expected.
Current Assets
Current assets are generally expected to be realised, sold or consumed within the normal operating cycle or within 12 months, or are cash or cash equivalents subject to relevant restrictions.
Examples include:
- Cash at bank
- Trade receivables
- Inventory
- Prepayments
Non-Current Assets
Non-current assets are assets that do not meet the criteria for classification as current.
Examples include:
- Buildings
- Machinery
- Office equipment
- Vehicles
- Long-term intangible assets
Depreciable non-current assets are generally shown at their carrying amount after relevant accumulated depreciation and impairment, subject to the applicable accounting policy.
What Are Liabilities?
Liabilities are present obligations of a business to transfer economic resources as a result of past events.
Current Liabilities
Current liabilities generally include obligations expected to be settled in the normal operating cycle, due within 12 months, or otherwise classified as current under the applicable reporting rules.
Examples include:
- Trade payables
- Accrued expenses
- VAT payable
- Short-term borrowing
Non-Current Liabilities
Non-current liabilities are obligations not classified as current.
Examples include:
- Long-term bank loans
- Long-term lease liabilities
- Certain long-term provisions
What Is Equity?
Equity represents the residual interest in a business’s assets after deducting its liabilities.
For a sole trader, equity may include capital introduced, accumulated profits and drawings.
For a limited company, equity may include share capital and retained earnings.
Practical Balance Sheet Example
Imagine a small UK limited company preparing its Balance Sheet at 31 December 2026.
For simplicity, the following figures are illustrative and shown in pounds sterling.
| Balance Sheet at 31 December 2026 | £ |
|---|---|
| Non-Current Assets | |
| Equipment (net book value) | 15,000 |
| Total Non-Current Assets | 15,000 |
| Current Assets | |
| Inventory | 8,000 |
| Trade Receivables | 7,000 |
| Cash at Bank | 10,000 |
| Total Current Assets | 25,000 |
| Total Assets | 40,000 |
| Current Liabilities | |
| Trade Payables | 6,000 |
| Accrued Expenses | 2,000 |
| Total Current Liabilities | 8,000 |
| Net Current Assets | 17,000 |
| Non-Current Liabilities | |
| Long-Term Bank Loan | 12,000 |
| Total Liabilities | 20,000 |
| Net Assets | 20,000 |
| Equity | |
| Share Capital | 5,000 |
| Retained Earnings | 15,000 |
| Total Equity | 20,000 |
Step 1: Calculate Total Assets
Non-current assets £15,000 + current assets £25,000 = £40,000.
Step 2: Calculate Total Liabilities
Current liabilities £8,000 + non-current liabilities £12,000 = £20,000.
Step 3: Calculate Net Assets
£40,000 − £20,000 = £20,000.
Step 4: Check the Accounting Equation
The Balance Sheet balances.
What Is Working Capital?
Working capital is the difference between current assets and current liabilities.
In our example:
£25,000 − £8,000 = £17,000.
Positive working capital generally indicates that current assets exceed current liabilities, although it does not guarantee sufficient available cash.
Balance Sheet vs Profit and Loss Statement
| Balance Sheet | Profit and Loss Statement |
|---|---|
| Shows financial position at a date | Shows financial performance over a period |
| Reports assets, liabilities and equity | Reports income and expenses |
| Helps assess financial position and liquidity | Helps assess profitability |
Balance Sheet in Xero, QuickBooks and Sage
Xero, QuickBooks and Sage provide Balance Sheet reporting features.
Depending on the software and subscription, users may be able to:
- Generate a Balance Sheet at a selected date
- Compare reporting periods
- Review account balances
- Investigate transactions behind figures
- Export reports for analysis
Common Balance Sheet Mistakes
- Confusing assets with expenses
- Recording loan repayments entirely as expenses instead of separating principal and interest
- Failing to record depreciation
- Omitting accrued liabilities
- Incorrectly classifying current and non-current balances
- Not reconciling bank and control accounts
- Assuming that a balanced Balance Sheet guarantees accurate accounts
Test Your Knowledge
A business has:
- Total Assets: £75,000
- Total Liabilities: £28,000
What is the business’s equity?
Click to reveal the answer
Equity = Assets − Liabilities
£75,000 − £28,000 = £47,000.
The accounting equation is: £75,000 = £28,000 + £47,000.
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