The balance sheet
Lesson 4 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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Questions you'll answer
Illustration: Kettle & Co has total assets of £150,000 and total liabilities of £90,000. What's the owners' equity?
Kettle & Co takes out a £20,000 loan and the cash lands in its account. What happens to the balance sheet?
Quick facts
- Cash in the business account → Current asset. Cash is the most current asset there is.
- Coffee beans and milk in the storeroom → Current asset. Stock that will be used within the year.
- The café's espresso machines → Non-current asset. Used for several years, so non-current.
- Supplier bills due next month → Current liability. Owed within a year, so current.
- A bank loan repayable in four years' time → Non-current liability. Owed after more than a year, so non-current.
- VAT owed to HMRC next quarter → Current liability. A short-term debt to the tax office.
- Fact: “A balance sheet shows a business's position on one particular date.” — It's a snapshot. The P&L covers a period.
- Myth: “Equity is the same thing as cash in the bank.” — Equity is assets minus liabilities. A business can have plenty of equity tied up in equipment and almost no cash.
- Fact: “Retained profits from past years build up in equity.” — Profits kept in the business, rather than paid out, add to what the owners' share is worth on paper.