Balance Sheet Essentials: Part 1 – Assets
Your company’s balance sheet is an essential tool in assessing the basic financial health of your business. The balance sheet contains a detailed listing of all of your business’ assets and liabilities, to give an accurate understanding of net worth, your company’s solvency and your ability to trade on an ongoing basis. In this first article of this two-part series about balance sheet essentials, we look at your assets.
What are “assets”?
At the most basic level, anything that belongs to your company is classified as an asset. For your balance sheet, the true meaning is somewhat more complicated, as your accountant will want to deduce your net assets, i.e. what is left after you add the claims against your business (liabilities), to your company equity. We will explore this further in our follow-up piece about liabilities.
Calculating your assets
Let’s start with how assets are calculated. Many businesses divide their assets into fixed and current assets, e.g:
Fixed assets (1)
Equipment 15,000
Buildings 105,000
Total 120,000
Current assets (2)
Stock 7,500
Work in progress 10,000
Trade debtors 15,000
Cash at bank 6,000
Total 38,500
Total assets: 158,500
As you can see from the examples above, fixed assets refer to long-term, tangible property such as land and equipment, whereas current assets are more fluid such as the amount of cash held at that particular point in time. It is worth investing in accounting software such as Xero for an accurate picture of your current assets at any given time, as these platforms offer a real-time view of your company’s finances.
What do I need to record as an asset?
Most balance sheets should take into account:
- Any cash in the company bank account(s).
- Any short-term investments.
- Any stock or saleable goods calculated at cost rather than market value. If you are VAT registered, these sums should include value added tax.
- Any monies owed to the company by customers
- Any monies owed to the company by you, in the form of a director’s loan
- Fixed assets such as land or equipment which are listed as belonging to your business. As a rule of thumb, fixed assets tend to have a lifespan in excess of one year.
Only half the picture
At this point, your balance sheet shows only half the story of your company’s finances. In the next instalment of this short series we will look at liabilities and how they affect balance sheet calculations. We will also help explain how to calculate net assets which will help you better understand your true financial performance.
A credit report
Your balance sheet is a useful document for assessing performance internally. It is not intended to show company profitability, the true market value of your assets or the market value of your business. Speak to your accountant about setting up the appropriate reports to gain these kinds of insights. Your balance sheet is like a credit report for your business: It shows your actual financial value and may be used as a determining factor by potential investors or anyone thinking about buying your business. It is extremely important to ensure that your assets are calculated and recorded correctly and kept up to date with the help of a modern accountant who is able to guide you in using the best accounting software for your needs.
