What’s included in a balance sheet?

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.

Here are the statement’s elements:

Assets
     ▶ Current Assets
     ▶ Non-current Assets
Liabilities
     ▶ Current Liabilities
     ▶ Non-current Liabilities
Equity
Specific Date

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.

Type of current asset How it converts to cash
Bank accounts Not applicable, as it’s already cash
Any cash in floats or tills Not applicable, as it’s already cash
Accounts receivable (people who owe you money) Your customers will pay you cash
Stock on hand (goods you’ve purchased to sell, but haven’t sold yet) You’ll sell these goods to customers, who will pay you cash
GST or tax refunds owing by the ATO These will be paid into your bank account (or used to pay other amounts due to the ATO)

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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.

Type of non-current asset How it is used by the business
Property, plant, and equipment (land, building, vehicles, machinery, furniture, etc) The business needs these non-current assets to generate income
Investments in shares This could be shares in the stock market, and/or shares held in a related company
Term investments As these can usually not be accessed without losing interest, they are classified as non-current
Loans These can include loans made to shareholders, the business owners, other companies, and family members

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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.

Type of current liability Situation
Bank overdraft You owe money to the bank
Credit cards You owe money to the credit card company
Accounts payable (suppliers you owe money to you) You need to pay suppliers for goods purchased or services used
Wages payable Your employees have performed work, but you haven’t yet paid them
GST, PAYE, tax payments due to the ATO You owe money to the ATO

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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.

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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 the Capital Account in your financial statements) will comprise your profits to date, the money you’ve deposited in the business bank account, and drawings. 

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.

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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 2021:

Assets

Bank account – $3,000
House – $785,000
Total assets – $785,000

Liabilities

Credit card balance – $1,000
Mortgage – $523,000
Total liabilities – $524,000

Equity

Net worth – $264,000 ($785,000 less $524,000)

Changes during the year
  • On 1 July 2021, you borrow $15,000 to purchase a vehicle
    • The asset and the loan will not be included in the balance sheet at 31 March – they didn’t exist at that date (for you). On 1 July 2021 your assets and liabilities would both increase by $15,000.
  • On 31 October 2021, you have an unconditional agreement to sell the house for $825,000; settlement will take place on 30 November 2021
    • At 31 October 2021, your equity has increased by $40,000 ($825k less $785k), and is now $304k. The $40k 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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Left with questions? We’re ready to hear them. [email protected]

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