A balance sheet is financial statement that outlines the assets (anything of value owned by the company) and liabilities (debts that you owe) of a retail business. A balance sheet can also be referred to as a “statement of financial position” so bear that in mind.
What does a balance sheet look like?
|Balance Sheet for ABC Retail Company on 30th November 2012|
|Land and buildings||2,000,000.00|
|Fixtures and equipment||12,000.00|
|Bank and Cash||150,500.00|
|Bank loan (due within 12 months)||10,000.00|
|Long Term Liabilities|
|Bank loan (due after 12 months)||1,500,000.00|
|Pensions and employer obligations||80,000.00|
|Paid in Capital||271,000.00|
There are a number of key headings on a balance sheet, which are outline in table 1.
Let’s start with assets. Assets refer to anything that is controlled by the retail business due to past events and which is likely to bring future economic benefits to the retail business. It comprises of Fixed Assets and Current Assets.
Fixed Assets are long term i.e. something that will be retained for a year or more and which the retail business does not intend on selling. For example, if you own a convenience store then you won’t be planning on selling that convenience store any time soon because that is your place of business and necessary to run the store. Fixed Assets also include “Fixtures and Equipment” such as shelving units, fridges and freezers – without these you wouldn’t have anywhere to put your stock. What about your POS system and other Computer equipment? How would you work out your takings for your retail store without this? So equipment such as your POS system is also a Fixed Asset. Finally, any vehicles that you may have could come under Fixed Assets, for example, you may use a van to collect some orders directly from the wholesaler for your convenience store. Without this van you may not be able to pick up extra stock you may require.
Current Assets are short term and can relate to stock (or inventory), credit owed and cash in the till or bank at the end of the period. Stock is a short term asset because you will own it for a while but you are planning on selling it quickly so that you can make a profit for your retail store. Cash will be moved about between the till and the bank as well as being used to purchase goods thus making it short term. Credit owed also known as “Debtor/Accounts Receivables” refers to a customer that has bought a goods on credit and owes the funds to the retail business – generally within the next 30 days.
Liabilities on the other hand refer to obligations that have been made in the past from which there is an expected outflow from the entity. Within liabilities you have Current Liabilities and Long Term Liabilities.
As you would expect Current Liabilities are short term and would include loan instalments that are due over the next 12 months. For example, you might owe a total of £2,000,000.00 for the land and the property you use for your retail business. However, you will more than likely have received a loan from the bank to pay for this but which you won’t have to pay back all in one go. It’s more than likely that you will be paying off the loan over quite a number a years. The amount due within 12 months would appear within Current Liabilities and the remainder would be stated in Long Term Liabilities. Invoices to be paid to suppliers can also come under this heading, these are also known as “Creditors/Accounts Payable”. You might have bought soft drinks or tinned food on credit from your supplier and therefore it is important to detail anything owed to suppliers on the balance sheet because soon enough (normally within 30 days) you are going have to pay them back.
Long Term Liabilities would be longer term such as the loan you took out to buy your retail store. As a retailer, you may also have employees who have signed up for a pension scheme, you will need to maintain a record of this so that you can forecast for the future how much you may need to pay out.
Equity refers to the residual interest after deducting the liabilities. It can include information such as “Retained Profit/Earnings” and “Paid in capital”. “Paid in Capital” or “Share Capital” will state the amount of money you have introduced to the company. “Retained profit/Earnings” refers to profits which have been kept in the retail business from previous years of operation – this is an alternative taking distributing to shareholders as dividends.
A simple equation to work out overall equity is Total Assets – Total Liabilities = Equity.
Basically the equity figure must be the same as the net assets as it’s what you have left over after liabilities are deducted and that’s why it should always balance – thus the name balance sheet.
Remember: A balance sheet only shows the financial situation for a period or moment in time for you retail business – it provides you with a snapshot.