FINANCIAL LITERACY • 23 JULY 2021 • 4 MIN READ

What’s included in a balance sheet?

SECTIONS

Assets

Liabilities

Equity

Specific Date

Up to speed on why balance sheets are so important? Now you’re ready to understand them inside-out.

This financial statement acts like a snapshot of your business’s assets, liabilities and equity at a specific date. That information can be used in conjunction with your profit and loss account to calculate income tax, meet legal requirements and spot opportunities to optimise.

Assets

These are items belonging to the business, which we split into the categories current and non-current.

Current assets

We class current assets as those likely to be converted into cash within 12 months of the balance sheet date. It means the value shown in the balance sheet is likely to match the eventual cash the business will receive.

Non-current assets

These assets are used to carry out business activities or generate interest or dividends for the company. They aren’t expected to be converted into cash within 12 months (though, they can be).

While their value is recorded at their original purchase price, it’s important to keep in mind that that isn’t necessarily what they’d be worth if they were to be sold. For example, vehicles and machinery decrease in value over time, and land values can increase.

Table showing the types of non-current assets

Liabilities

A liability is money you owe to another person or organisation. As with assets, we separate these into current and non-current.

Current liabilities

Current liabilities are expected to be paid within 12 months of the balance sheet date.

Non-current liabilities

Non-current liabilities don’t usually require payment within the next 12 months. The most common type of non-current liability is a long-term loan.

Equity

The equity section is what you might call the balancing figure and it represents the ultimate value of the business to its owners.

Equity = assets – liabilities

Within equity, retained earnings is the most interesting figure. It represents the profits from previous years that have been kept in the business, rather than paid out to shareholders.

Equity for sole traders

Equity (called Share Capital in your financial statements) will comprise of your profits to date, the money you’ve deposited in the business bank account, and drawings (withdrawals).

It’s possible for equity to become negative – when liabilities exceed assets. Such situations are an indicator of insolvency – the business’s ability to continue operating. If this applies to you now or appears likely in future, we urge you to seek professional advice. There can also be serious legal consequences for continuing to trade while insolvent.

Specific Date

We treat a balance sheet like a snapshot of asset’s liabilities and equity on a specific date. Let’s see what it can look like at 30 June 2022:

Changes during the year:

On 1 July 2022, you borrow $4,500 to purchase a vehicle - The asset and the loan will not be included in the balance sheet at 30 June as they didn't exist at that date (for you). On 1 July 2022 your assets and liabilities would both increase by $4,500
On 31 October 2022, you have an unconditional agreement to sell the house for $822,000 and settlement will take place on 30 November 2022 - At 31 October, your equity has increased by $40,000 ($822,000 less $782,000) and is now $301,000. The $40,000 increase doesn't mean your equity at 30 June was incorrect, it's just that we're recording the value of the asset at a different date.

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