Understanding your numbers part 3 – What is a balance sheet (again)? Or what happens if your business stops today….

April 9, 2012

Yesterday I had one attempt at what a balance sheet was, here’s my second attempt…..

If your business stops on the year-end date (the date that the accounts are made up to), the amount that would eventually be in your bank account would be the amount that is on the net assets line on the balance sheet.

So let’s play this out.

Your business stops on the date of the accounts, here’s what actually happens:

Your fixed assets are sold at the written down value, your stock is sold at cost, all the people who owe you money pay you, you pay all your suppliers, you pay the taxman (for corporation tax, PAYE/NI and VAT), you pay the bank overdraft and loan, you pay the lease company, you pay the directors, your bank balance goes up and down as a result of all of this and your bank balance therefore becomes the net assets number that was in the accounts in the first place.

So the numbers don’t actually change they just change category. Everything goes to zero, except the bank which goes up and down but should end up on a positive balance (unless you started off with a negative net assets figure).

Of course if your business really did stop, this is what really would happen – most of your fixed assets would be written off unless you could find someone who wanted to buy a computer, your stock could be sold but possibly less than cost, most people would pay you what they owed you but some wouldn’t, you would pay your suppliers and the taxman and the bank i.e. you would pay everybody you owed but not everybody would pay you and your assets may not realise the cash that they are valued in the balance sheet.

So is your balance sheet overvalued? I’ll discuss this tomorrow with my third go at explaining the balance sheet….

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