How to read a UK balance sheet: a guide for founders

Good news: balance sheets are not as complicated as they seem. In fact, they’re fairly straightforward and nothing to be intimidated by. As a business owner, understanding a balance sheet is one of the most useful things you can do. It tells you where you stand financially, which allows you to make decisions and plan for growth.

In this guide, we explain what a balance sheet is, what all the financial terms mean, and how to read your business balance sheet. 

Key takeaways

• A balance sheet is a snapshot of your business’s financial position at a specific point in time
• It’s split into three sections: assets, liabilities, and shareholders’ equity
• The golden rule: assets always equal liabilities plus equity
• Reading a balance sheet regularly helps you make smarter business decisions

A balance sheet is a financial statement that shows a business’s assets, liabilities and shareholders’ equity at a specific time. Think of it like a financial photograph. Let’s break down those terms:

• Assets: everything your business owns
• Liabilities: everything your business owes
• Shareholders’ equity: what’s left over for you as the owner

In the UK, you’ll typically need to prepare a balance sheet as part of your annual accounts if you’re running a limited company.

At this point, it’s worth clarifying that a balance sheet is different from two other key financial documents you might come across. 

1. A profit and loss account: This shows how much money your business has made or lost over a period of time. It’s all about income and expenses
2. A cash flow statement: This tracks the movement of cash in and out of your business

Your balance sheet, on the other hand, is a fixed–point–in–time view of your financial health.

It’s called a balance sheet for a very good reason: it always balances.  

Formula: Assets = liabilities + shareholders’ equity

No matter what, these two sides will always equal each other. If they don’t, something’s gone wrong, and you need to double check your numbers. Don’t worry, it happens. 

Your balance sheet tells the story of your business’s financial position. It helps you (and anyone else who looks at it) understand whether the business is in a strong or weak financial position. 

Lenders, investors and even potential buyers will often ask to see a balance sheet before making any decisions.

According to Companies House, there are over 4.2 million limited companies registered in the UK. Every limited company is required to file accounts with Companies House and this includes a balance sheet. So if you’ve recently completed company registration, it’s definitely time to start understanding your balance sheet. But don’t think of it as an admin task. Knowing what your balance sheet means is useful for every business owner, even if you’re a sole trader with no Companies House filing responsibilities. 

At a glance, your balance sheet can tell you: 

• How much your business is worth
• Whether you’ve got enough to cover your debts
• How efficiently you’re using your assets
• How your financial position has changed over time

That’s a lot of insight from one document. 

As mentioned, a balance sheet is laid out in three main sections. Here’s a quick reminder:

• Assets 
• Liabilities 
• Equity 

Each of these sections has its own sub-categories and terminology, but we’ll take them on one at a time. 

Assets are everything your business owns or is owed that has a financial value. 

If you want a simple but deeper dive into this topic, check out our guide to business assets, which is created specifically for small business founders. 

For balance sheet purposes, assets are split into two categories:

1. Current assets: these are things that are expected to be converted into cash within the next 12 months. This includes cash itself,  inventory and short–term investments 
2. Fixed assets: These long–term items that your business uses. Fixed assets include things like vehicles, machinery, property, or equipment 

Good to know: your business can also have what’s called intangible assets. Intangible assets include: intellectual property (like patents and trademarks), software, permits and goodwill (like brand reputation and customer loyalty).  

These are your company’s non-physical assets of value that contribute to your business’s earning potential. Intangible assets usually appear on a balance sheet when one business buys another, so you’re not likely to see them on your small business balance sheet. But it’s worth knowing. 

• Cash in bank and in hand: the money your business has available right now, either in your business current account or as physical cash
• Accounts receivable: the money owed to your business by customers, individuals and companies
• Tangible assets: also known as fixed assets, these are physical items your business owns
• Debtors: individuals, suppliers, or financial institutions you owe money to for goods, services, or loans
• Net current assets: this number is your current assets minus your current liabilities (debts), also known as working capital

Also known as accounts receivable, or simply as receivables, debtors are customers, individuals and companies who owe your business money. If you’ve sent an invoice and it hasn’t been paid yet, that customer is a debtor. The outstanding amount shows up on your balance sheet under current assets.

It’s worth keeping a close eye on your debtors figure. A high number here could mean you’ve got cash tied up in unpaid invoices, which affects your day–to–day cash flow even if the business is profitable on paper. Though you can’t always control when people pay you, having a clear invoicing process, with clear payment terms, makes a real difference to your balance sheet.  

Depreciation means spreading the cost of a business asset over its useful life (ie. the amount of time it’s useful to your business).

For example: say you buy a breadmaking machine for your bakery business for £20,000. If you recorded the whole £20,000 as an expense in the month of purchase, your profit and loss statement for that month would take a massive hit. 

Depreciation lets you spread that £20,000 across your breadmaking machine’s expected working life — let’s say four years. Depreciation also accounts for your asset’s decline in value. This is very important for your balance sheet. Remember, your balance sheet is a snapshot of what your company is worth at a specific period of time. In four years, your bread machine isn’t going to be worth what you originally paid for it. 

Depreciation lowers your asset’s value on your balance sheet. This is known as its ‘book value’. And the purpose is to create an honest and fair snapshot of your company’s total assets. In other words: how much your company is worth.

Liabilities are the flip side of assets. They’re everything your business owes to someone else. You might also hear them called debts, and the two terms are often used interchangeably. Like assets, liabilities are split into two categories:

1. Current liabilities: these are debts that need to be paid within the next 12 months. This includes things like outstanding supplier invoices, VAT owed to HMRC, or a short-term loan repayment
2. Non-current liabilities (also called long-term liabilities): these are debts that don’t need to be repaid within the next year. A business mortgage or a long-term bank loan would sit here.

• Accounts payable: this is the money your business owes to suppliers for goods or services you’ve received but haven’t paid for yet
• Accruals: these are expenses that you haven’t paid the bill or invoice for yet. For example, utility bills
• Tax liabilities: the amounts owed to HMRC, such as Corporation Tax or VAT
• Long-term loans: any borrowing that won’t be repaid within the next 12 months

Creditors are the businesses or individuals that your company owes money to. If you’ve received goods from a supplier but haven’t paid the invoice yet, that supplier is a creditor.

On your balance sheet, you’ll see creditors listed under current liabilities if the amount is due within 12 months. It’s a good idea to keep on top of what you owe as it helps to manage your cash flow and keep good relationships with your suppliers.

Shareholders’ equity (sometimes called owner’s equity or net assets) is what’s left over for you, the owner/s, of the business once all the liabilities have been subtracted from the assets. 

Calculation: 

Total assets — liabilities = shareholders’ equity 

This figure is important when it comes to assessing the health of your business. 

Positive equity means your business owns more than it owes. This is a good sign. Negative equity means the opposite, which is something to take seriously. Of course, every business goes through peaks and troughs, but investors and lenders will pay close attention to this number when evaluating a business.

• Share capital: the amount of money invested in your company by shareholders in exchange for shares
• Retained earnings: profit that has been kept in the business rather than paid out (for example, as dividends)
• Current year earnings: the profit (or loss) your business has made in the current financial year, before it’s formally transferred to retained earnings
• Dividends paid: the money distributed to shareholders from the company’s profits
• Total capital and reserves: the total of all business equity (should equal the same as the net assets figure)
• Opening balance: the equity position at the start of the accounting period

Here’s an example of what a balance sheet might look like for a small limited company. 

This isn’t a real business, but we’ve created a fake company name and made it as true to life as possible. See if you can spot the terms listed earlier in this guide. 

Note: all figures are in £ (GBP)

So, let’s look at how Bright Ideas Limited is doing.

• Retained earnings grew from £85,300 to £102,500. This shows that the company was profitable during the year and kept those profits to reinvest rather than paying them all out as dividends
• Notice how property and equipment dropped from £152,000 to £145,000? This is depreciation. These physical assets lose value over time
• Accounts receivable dropped slightly to £24,300, which suggests the company got better at collecting payments from its customers

Overall, the company is looking healthy and in a safe position to pay its bills. We know this because:

Formula: Total current assets / total current liabilities 

In this balance sheet that’s: 97,900 / 48,150 = 2.03

If the number is above 1.0, it indicates that the company is healthy and in general good shape. 

Getting your head around your balance sheet is a big step towards feeling in control of your finances. The more regularly you look at your accounts, the more familiar you’ll be with the terms, the numbers and what they mean for your business.

We hope this guide helped build your confidence — but don’t stop there! Whether you’re just starting out or looking to grow an existing business, we’re here to help. 

Countingup is built for small business owners. From quick and easy company registration to our smart business current account with built-in bookkeeping, we can get your business up and running in 24 hours. 

In the meantime, you can find loads more accounting guides on our resource hub. 

Best of luck!

If you’re a limited company in the UK, yes, you’re legally required to prepare a balance sheet as part of your annual accounts, which you file with Companies House. If you’re a sole trader, you’re not legally required to produce one, but it’s still a really useful document to understand your financial position.

You won’t! Turnover (your total sales revenue) appears on your profit and loss account, not your balance sheet. The balance sheet focuses on what you own and owe at a specific point in time, not on income and expenditure over a period. 

Yes, they’re the same thing. A statement of financial position is the more formal, technical name. You’ll often see it used by accountants or in official filings. Balance sheet is the more widely used everyday term. Both refer to the same document.

You can create a balance sheet manually using a spreadsheet, or use accounting software to generate one automatically. Lots of bookkeeping apps will produce your balance sheet for you, so you don’t have to do the legwork yourself. If you’re unsure, an accountant can also help pull one together.

Goodwill is an intangible asset. It represents the value of things that aren’t physical but still add value to a business, such as its reputation, customer relationships, or brand. It typically appears on a balance sheet when one business buys another for more than the value of its tangible assets. The difference between the purchase price and the actual asset value is recorded as goodwill.