The balance sheet 043-03070020

A balance sheet lists the assets, liabilities and proprietorship of a business at a particular date. It is part of the financial statements that are often prepared in conjunction with a tax return.

• The balance sheet will reveal the nature and value of business assets and liabilities
• It is necessary to establish the total value of all business assets and liabilities in order to calculate the value of the customer's share or interest in the business

The asset position of a business as detailed in the balance sheet does not necessarily equate to the current market value or worth of a business. Revaluation of business assets, particularly property and listed shares, to their market value or realisable value, may be required. Valuations for some assets such as property are obtained from approved valuers.

Generally, the financial statements include Notes to and forming part of the Accounts (explanatory notes). These notes provide more detailed information on the items recorded in the financial statements, for example, a breakdown of the amount owed to each trade creditor. Another common item included in the Notes is the Statement of Accounting Policies. This statement advises, among other things, the valuation method adopted for recording assets. It is necessary to obtain these schedules or notes to ensure that an accurate assessment of income and assets can be completed.

Assets are items or possessions owned by a business (such as properties, investments, stock etc.), and include amounts owed to the business.

The assets of a business are normally classified according to their degree of liquidity, that is, how easily they can be converted into cash.

Common balance sheet headings include current assets and non-current or fixed assets.

There are various methods available to accountants to determine what value to place on assets recorded in a balance sheet. Some assets are shown on the balance sheet at historical cost, (the original cost of the item at the time of its acquisition) which may differ from the current market value:

• cash at bank will be at current value
• land and buildings will usually be at the original cost (historical value)
• plant and machinery, motor vehicles, and land and buildings will usually be recorded at their historical cost, less any accumulated depreciation

Historical cost is the valuation method used by most businesses. For this reason, the values for some assets shown in the balance sheet cannot be used for asset test purposes, and it may be necessary to obtain a customer's estimate of the current market value, or obtain valuations from an approved valuer, for example, for land and buildings.

Liabilities are any loans outstanding or debts owed by the business (such as overdrafts, creditor debts, mortgages, or loans from the business owners). The amount of liabilities owed by a business will fluctuate over time as loans are repaid or additional borrowings obtained. Liabilities are generally expressed at current value.

The liabilities of a business are normally classified according to the time in which they are due to be repaid. Common balance sheet headings include current liabilities and non-current liabilities.

Under the legislation for private trusts and private companies, effective 1 January 2002, recognised and non-recognised liabilities of a controlled private trust or a controlled private company have to be considered. An example of a non-recognised liability is a loan not made on a commercial basis, a loan from a person aged under 18, or a loan secured against a non-company or exempt asset.

Proprietorship is the difference between the value of the assets and the value of the liabilities. It is the amount the owners of the business would receive if they sold all the business assets and repaid all the business liabilities.

Proprietorship represents the owner's equity in that business. It represents the contributions of funds made by the owners of the business and accumulated profits, as well as any withdrawals (drawings) made from the business. The proprietorship of the business should equal the value of the net assets of the business.

Proprietorship = Assets less Liabilities

This is how the balance sheet gets its name - the net assets must balance with the capital.

Depending on the business structure in question, owner's equity may be known by different terms:

• sole trader - proprietorship, proprietor's funds
• partnership - proprietorship, partnership funds, proprietor's funds, total proprietor's funds, partnership assets
• company - shareholder's equity
• trust - trust funds
• all business structures - capital

The assessable asset value of a business is generally the proprietorship. However, as the value of assets stated in a balance sheet may be the historical cost rather than current market value, adjustment to the proprietorship may be required to determine the current assessable value of a business.