What is the balance sheet?
The balance sheet is the heart of any accountancy, along with the results. But the balance sheet is secretly even more important than the results. This is because you start your balance sheet on the day you start your business and take it with you up until the day you stop your business. It is the only part of your accounting that you take with you every year into the next year. The balance sheet is an overview of how your business is put together. In other words, what you have and how that was paid for:
- Your company's possessions, also called assets (activa).
- Your company's debts, also called liabilities (passiva).
What you don't directly keep track of on the balance sheet are:
- Your company's income.
- Your company's expenses.
You keep track of income and expenses in the results. At the end of a year you do bring the results to the balance sheet during the year-end closing, but that's a story for another time. We're going to talk about the balance sheet for now.
Modern accounting is based on an idea that has been thoroughly worked out. Double-entry accounting. This ensures that you notice errors immediately. The balance sheet is where you usually notice this first. Not very surprisingly, the balance sheet has to be balanced. That works as follows:
The balance sheet has a left side and a right side. At the bottom of each of those sides is a total, this is the sum of all the categories on that side. And those totals on the left and right? They should always be the same, in that case your accounts are balanced. When your accounting records are all kept and the balance sheet is balanced, then you can be assured that the entire underlying accounting is in order.
What does that look like?
Think of it as a sheet of paper where you have drawn a line down the middle. It has two sides; on the left are the possessions, on the right are the debts. The debts on the right explain how you came into possession of the possessions on the left. Both sides are also divided into subcategories, for an even deeper understanding of how it all works exactly.
An important thing to understand about the balance sheet is business assets. This is special. It is a sum of the items and money on the left, minus the debts on the right. The result of that sum is the business assets. In short, the current value of your business expressed as a sum of both the money and the items in it.
If the business stops, that money will go to you. That's why it's on the right under debts. You should think of it as a debt from the business to you, the owner of the business. But beware, this can also be a negative amount if you weren't doing very well in business. In that case, you get a nasty inheritance from your business.
Your company's posessions.
Your company's debts.
|Fixed Assets (vaste activa)|
Things that last for years, such as cars and buildings.
|Business assets (ondernemingsvermogen)|
Also known as equity. The company's debt to its owner.
|Current Assets (vlottende activa)|
Things that are gone again within a year, such as stock.
|Current liabilities (kortlopende schulden)|
Debts to others, such as VAT, paid off within a year.
|Cash and cash equivalents (liquide middelen)|
Cash. From cash drawers containing cash to bank accounts.
|Long-term liabilities (langlopende schulden)|
Debts to others, such as mortgages, that take years to pay off.
The essence of accounting
This background article is part of the series 'The essence of accounting'. It doesn't say anywhere that it is forbidden to read them all.