Now you’ve seen how the day-to-day recording of transactional information is recorded. But how do you put it into a format that can help you see the financial state of the organization? This is where the Balance Sheet comes in. It is a ‘snapshot’ of the finances of the business at one given time. The information given includes what the business owns and what it owes.

There are three sections to the Balance Sheet:

• Assets – the items of value owned by the company
• Liabilities – the company’s obligations, whether to pay for or provide goods or services at a future date
• Equity –  the amount of net assets (assets – liabilities)

A Balance Sheet gets its name from the fact that the total of the assets listed must equal the total of the liabilities and equity – in other words, the two sides of the sheet must balance. For an example of a Balance Sheet, see the figure below. It’s a relatively simple example, since most businesses will have many more accounts under their assets, liabilities, and equity categories on their Chart of Accounts. But you can get the basic idea for how the information is shared via the Balance Sheet.

What a Balance Sheet Tells You

There is good information on the Balance Sheet, such as:

• A summary of the organisation’s assets and the claims against those assets as of a specific date.
• Information about the organisation’s current ability to pay its current debts. You can only tell at the moment, for the liabilities that the accounting team has already entered into the financial system. If a large liability were to be incurred tomorrow, the financial picture could shift significantly.
• The information shows how the organisation is positioned to keep going with the day to day business operations. For example, the assets listed give you some idea of what you have available right now to keep trying to generate new assets (new revenue).
• The Balance Sheet also shows what claim the owners have against the business’ assets. Of course, this is conditional on the other liabilities being satisfied.

What the Balance Sheet Doesn’t Tell You

There are several parts of the financial picture that are not included in the Balance Sheet. For example, the Balance Sheet does not tell you:

• How any profits were made. For that information, you’d need to look at the Income Statement.
• Which assets creditors have claims against. For example, if you are financing equipment, your creditor has a claim against that equipment until it is paid.
• What kind of capital investment was made. You might assume that we’re talking about cash, but instead, the owner or owners might have purchased a building that is not necessarily convertible back to cash (at least not immediately).
• What value the business would have on the market place. For example, if the owner purchased that building for R50,000 10 years ago, it might be worth twice that now. Or, it could even be worth less if the real estate market has suffered since then.