If you’re a business owner or an investor in the UK, you should understand how to read a balance sheet of a UK company.
Wondering why do you need to read it. If you are unable to read a balance sheet, you can’t know the financial strength of your business. And you can’t make the right investment decisions for its growth.
In addition, if you’re an investor, you can’t predict the business performance. And investing in a bad company may waste all your money invested.
In this post, we’ll uncover how to read a balance sheet of a UK company to make the right decisions to grow your business beyond numbers. Let’s delve deep into it!
How to Read a Balance Sheet of a UK Company?
By reading a balance sheet, you can better understand the company’s accounts within a specific time. If you are willing to read a balance sheet, you first need to understand and analyse the business’s assets, liabilities and equity to know what a company possesses and what it needs to pay in a certain time. In this instance, you need to:
1) Know the Current Assets
Current assets are those assets that a business owns, which are turned into cash within one year. They include:
- Cash: Cash includes hard currency, checks and unrestricted bank accounts
- Account Receivable: Accounts receivables are short term payments that your business is going to receive like the invoices that your client needs to pay soon
- Inventory: These are the goods and products that are ready to sell. It also includes the raw materials that are used to produce them
2) Examine Non-Current Assets
These are such assets that can’t be turned into cash easily and it takes more than a year to convert them into cash. These include:
- Tangible Assets: These are those assets that are tangible like land, machinery and equipment like computers and car
- Intangible Assets: Assets that do not exist physically like patents, goodwill, copyrights, etc are called intangible assets
3) Analyse Liabilities
You can’t read a balance sheet without understanding the liabilities of a business. These are the financial obligations a business need to pay to another entity or person. Liabilities are divided into:
- Current Liabilities: These are the short term liabilities that a business is required to pay within the time limit of twelve months these include short term debts, accounts payable, etc
- Long-Term Liabilities: These liabilities are those financial obligations that are payable in more than a year like pensions obligations, long term loans, etc
4) Know Shareholder’s Equity
Shareholders equity shows the total net worth of a business. It includes the amount given by the owners and shareholders used for setting up a company. And it also includes the money that is reinvested in a business at the end of the year, these earnings are also reported on the balance sheet under shareholders equity.
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How Does Balance Sheet Work?
Here is the basic formula that the balance sheet uses:
Assets = Liabilities + Shareholder’s Equity
Here, assets will be recorded in the first column. These are the things that a business owns like equipment, machinery, land etc. Liabilities will be recorded in the second column of the balance sheet. It includes things that are payable like loans, wages and taxes. And the shareholder’s equity comes underneath liabilities. It includes retained earnings and common stock, etc.
As shown in the formula, a balance sheet evident by the name should equalize total assets with the business liabilities and shareholder’s equity. If these values are not the same there can be serious cash flow issues or there might be a mistake during the accounting process.
Quick Sum Up
To sum up the discussion, this post has helped you to know how to read a balance sheet of a UK company. To read it, you need to know its three basic elements: assets, liabilities and shareholder’s equity. With this information, you can find out the financial performance of any business to make investments and to make effective business decisions. A balance sheet can be difficult to understand for a person who’s new to the business, therefore taking the help of an accountant is worth your time and money. An accountant will best differentiate between assets liabilities and shareholder’s equity. He/she can balance the statement and can correct miscalculations, errors and any missing data. A tiny mistake can create great trouble for your business.
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Disclaimer: This blog provides basic information on the balance sheet.