What Is a Balance Sheet: Definition, Components and Example

Regardless of whether you run a small or large business, knowing its net worth is a key component that can help guide your financial decision making. To determine a business’ net worth, you or your financial manager need to create a balance sheet.

If you’re new to such terminology, this article is for you. Below, we answer the question of what is a balance sheet and discuss its components. We also mention examples to help you create your own. Let’s begin.

Introduction to Balance Sheets: The Definition

A company’s balance sheet is the statement of the business’ net worth. It provides a “snapshot” of the company’s financial position for a specific period and gives insights into the business’ book value.

On its own, balance sheets are valuable pieces of financial information. However, when read in conjunction with your income statement and cash flow statement, you can get a better picture of your business’ financial health.

A balance sheet comprises three primary “ingredients”. These are the value of the business’s net assets, its net liabilities and shareholder equity, also referred to as equity or owner’s equity.

In terms of the Generally Accepted Accounting Practice (UK GAAP) and International Financial Reporting Standards (IFRS), these three components always work hand in hand. Furthermore, they are analysed over a specific period of time during which the business operates. 

In short, the balance sheet summarises the company’s financial condition for a specific period and can shed light on the company’s financial health.

The Balance Sheet Formula

The balance sheet formula is as follows:

Assets = Liabilities + Shareholders’ Equity

Assets are both current and non-current, where current assets refer to a period of one year or less and non-current refer to a period of 12 months or more. Liabilities can also be categorised as current and non-current using the same explanation as assets earlier. 

Shareholder’s equity, on the other hand, can refer to the financial injection the owner has put into the business, shares issued, dividends paid out and other related aspects.

The balance sheet formula can also be expressed as:

Shareholders’ Equity = Assets – Liabilities

Alternatively, it can be represented as:

Liabilities = Assets – Shareholder’s Equity

Whether you’d like to look at the total value of your business assets, your total liabilities or your business’ net worth in the form of shareholder equity, the adjustable formula helps you do that. 

It is important to note that there must always be a balance between the three key balance sheet “ingredients”. For example, your total assets must always equal the sum of liabilities plus shareholder’s equity and vice versa.

For example, if your business has £5,000 in assets, and £3,500 in liabilities, your shareholder’s or owner’s equity will be equal to £1,500. 

Key Components of a Balance Sheet

Let’s look at the three key components of a balance sheet and how they are further subdivided into different categories.

Assets

The brief definition of an asset is everything that a company owns. 

However, assets can be grouped into current and non-current assets:

• Current assets refer to cash, accounts receivable, your inventory and any cash equivalents that the business owns.
  
• Non-current assets include fixed assets, long-term investments and intangible assets such as intellectual property, trademarks, goodwill and others. 

Current assets are those that are liquid at the moment or can be made liquid relatively quickly, whereas non-current assets such as property and inventory require more time to be made liquid.

Liabilities

A liability is everything that a company owes to an external party. This can include a loan from a bank, taxes, wages payable to employees and other factors. 

Similar to assets, liabilities can be split into current and non-current.

For example, current liabilities may include your accounts payable, any short-term obligations your business may have as well as accrued expenses. As for non-current liabilities, these may include long-term debt, your business’ long-term financial obligations and deferred tax liabilities.

Shareholders’ equity

The definition of shareholder’s equity is the residual interest once your net liabilities are subtracted from your business’ net assets.

Examples of equity include retained earnings, paid-in capital and the total shareholder’s equity which includes the payment of dividends to shareholders plus issued share capital for public organisations.

Shareholder’s equity can be referred to as the business’ net worth and this can be helpful for financial goals and decision-making purposes.

How Balance Sheets Work

A balance sheet is one of the core financial statements used by businesses to understand their financial position. Unlike income statements or cash flow statements, which cover a period of time, the balance sheet captures a business’s assets, liabilities and equity at a single point in time.

This makes it a vital tool for business owners, investors and lenders who want a “snapshot” view of financial health.

Reporting period and frequency

The balance sheet shows where a business stands financially on a particular date. For example, “Balance Sheet as at 31 March 2025.” This “snapshot” nature means it is not about performance over time, but rather the value of what the company owns and owes on that specific day.

In the UK, businesses typically prepare balance sheets:

• Annually: As part of their statutory accounts filed with Companies House.
• Quarterly or monthly: Especially for larger businesses, or where directors and investors need more frequent updates for decision-making.

For small businesses, preparing balance sheets at least annually ensures compliance, while more frequent reporting can help track cash flow and manage growth effectively.

Insights provided by a balance sheet

A balance sheet goes beyond just listing figures. It reveals how financially stable a company really is. It allows stakeholders to evaluate:

• Liquidity: Can the business meet its short-term obligations with the assets it holds?
• Solvency: Does the business have enough assets to cover its long-term liabilities?
• Overall financial position: What is the true value of the company once debts are considered?

From this, key metrics can be calculated, such as:

• Net assets: The difference between total assets and total liabilities, showing the business’s true worth.
• Financial strength ratios: For example, the current ratio (current assets ÷ current liabilities) helps assess short-term financial health.
• Leverage: The proportion of debt compared to equity, indicating how reliant the business is on borrowing.

Together, these insights help business owners and external stakeholders make informed decisions, whether it’s planning investments, managing risks or assessing the business’s long-term viability.

Practical Examples of Balance Sheets

To understand how a balance sheet works in practice, imagine a small UK café that accepts payments through card machines.

On its balance sheet dated 31 March 2025, the café records assets such as £5,000 in cash, £2,500 in card payments pending settlement, and £10,000 worth of equipment.

On the liabilities side, it shows a £4,000 short-term bank loan and £2,000 owed to suppliers. The difference (which is its equity) represents the owner’s stake in the business.

This simple example highlights how everyday operations flow into a balance sheet. Accepting card payments increases accounts receivable until the funds clear.

Borrowing money boosts available cash but also creates a liability that must be repaid. Paying off supplier invoices reduces both liabilities and cash reserves, directly impacting liquidity.

For small businesses, a balance sheet is more than a compliance document. It’s a practical tool to track financial stability, manage borrowing responsibly and ensure healthy cash flow to keep operations running smoothly.

The Role of Balance Sheets in Financial Analysis

Balance sheets are more than a compliance requirement. They form the foundation of financial analysis. By comparing figures across different periods and calculating ratios, businesses can gain valuable insights into stability, efficiency and growth potential.

Financial ratio analysis

Several key ratios are derived directly from balance sheet data:

• Liquidity ratios: The current ratio (current assets ÷ current liabilities) and quick ratio (excluding inventory) measure whether a business can cover short-term obligations.
• Leverage ratios: The debt-to-equity ratio shows how much a company relies on borrowing compared to owner investment.
• Profitability ratios: Return on equity (ROE) reveals how effectively a company generates profit from shareholders’ equity.

For UK SMEs, these ratios are crucial for decisions like securing bank loans, attracting investors or planning sustainable growth.

Evaluating business health

A balance sheet also signals whether a business is financially strong or at risk. Consistently high liabilities compared to assets may indicate distress, while healthy reserves and low debt suggest stability.

In the UK context, businesses must also factor in VAT obligations and local taxes, which appear as liabilities. These can significantly affect cash flow if not managed carefully.

By monitoring such elements, SMEs can anticipate financial pressure points, stay compliant and make informed operational decisions.

The Importance of Accurate Balance Sheets

Accurate balance sheets are key for both compliance and good business management. In the UK, companies must follow accounting standards such as GAAP or IFRS when preparing financial statements.

This ensures consistency, transparency and reliability, which are qualities that regulators, lenders and investors expect. For business owners, a precise balance sheet is a decision-making tool. It helps identify whether the company can afford to expand, take on new debt or distribute profits.

For stakeholders such as banks or potential investors, it provides confidence in the business’s financial integrity and future prospects.

However, errors (such as misclassifying liabilities, overstating assets or omitting tax obligations) can have serious consequences. They may lead to poor financial decisions, difficulties in securing funding or even penalties for non-compliance.

By maintaining accurate and up-to-date balance sheets, businesses safeguard both their reputation and their long-term financial stability.

How Balance Sheets Relate to Accepting Payments

Modern payment methods, especially card machines, directly influence how businesses manage and report their financial position. The way payments are processed affects both cash flow and the structure of a balance sheet.

Managing assets and liabilities

When customers pay by card, the funds often take a day or two to settle into the merchant’s business account. Until then, they are recorded as accounts receivable, an asset on the balance sheet.

This highlights the importance of incorporating payment data accurately, by ensuring that pending settlements, bank balances, and liabilities such as supplier invoices are properly reflected. By tracking card transactions alongside other financial activity, businesses can maintain a reliable picture of liquidity.

With myPOS, this is a step that can be omitted as you receive all funds from every sale instantly into your merchant business account. This significantly simplifies the process and ensures you can keep better track of incoming payments while closely monitoring your balance sheet and keeping it up to date.

Improving financial position

UK businesses that use card machines often benefit from faster, more predictable cash flow compared to handling only cash or invoices. For example, a retail shop accepting mostly card payments can manage stock purchases and supplier payments with greater confidence.

Integrating payment systems into accounting software further improves accuracy, reduces reconciliation errors and provides real-time visibility of cash flow. This helps businesses meet short-term obligations while strengthening their overall financial position.

Conclusion

A balance sheet is one of the most important tools for evaluating a company’s finances. By clearly presenting a balance sheet example of a UK business, it becomes easier to see how the interaction between a company’s total assets, company’s liabilities and equity defines overall company’s health.

Alongside other financial statements, such as the income statement and cash flow statement, it helps business owners and stakeholders gain a complete picture of performance and stability.

Key metrics like the debt to equity ratio provide insights into how much a business relies on borrowing, while tracking long term liabilities, long term assets and long term debt ensures a realistic view of sustainability. Accurate reporting also makes it easier to compare results with net income and plan for growth.

For UK businesses, maintaining precise balance sheets isn’t just about compliance. It’s about making informed decisions that strengthen resilience, improve cash flow and support long-term success.

Frequently Asked Questions

What are the 3 main things found on a balance sheet?

The three main elements of a balance sheet are the company’s assets, liabilities and total shareholders equity. This is represented by the balance sheet equation: Assets = Liabilities + Shareholders’ Equity. Assets include both short term assets like cash and receivables and long-term holdings. Liabilities are the money owed to banks, suppliers or tax authorities. Equity shows the residual value after all debt obligations are deducted. Together, these components form a statement of financial position that captures the business’s financial health at a specific point in time.

How to interpret a balance sheet in the UK?

To interpret a balance sheet, UK businesses start by reviewing their cash account and other short term assets to see how much cash is available for immediate use. They also examine the current portion of liabilities, such as supplier invoices or VAT owed. Analysts then look at how much leverage the company manages through debt versus equity. By comparing important financial statements like the balance sheet, cash flow statement and income statement, a business gains a clearer picture of stability and growth potential.

How to tell if a company is profitable from a balance sheet?

Generally speaking, a balance sheet alone does not show net profit. However, it does reveal whether the company decides to reinvest earnings or distribute dividends, which is reflected in retained earnings under total shareholders equity. By analysing changes in a company’s assets, reductions in money owed and how debt obligations are being managed over time, you can infer whether profitability is improving. To confirm profit, it’s best to review the income statement alongside the balance sheet.

Does a balance sheet show profit?

No, a balance sheet does not directly show profit. Instead, it captures a company’s finances at a specific point in time. What it does display is retained earnings, part of total shareholders equity, which accumulates past profits after dividends are paid. To determine exact profitability, you must look at the income statement, which reports revenue and expenses. Still, a balance sheet can indicate financial strength by showing how much cash is available, the current portion of debts and how much leverage the company manages to fund growth.