How to Read a Balance Sheet: A Guide for UK Business Owners
Once a year, your accountant hands you a set of accounts and asks you to sign. Most owners flick to the profit figure, nod and pick up a pen. The balance sheet sits right there, mostly unread.
That one page holds more answers than your profit figure ever will. This guide shows you how to read a balance sheet by asking it six plain questions. You don’t need any accounting training. You just need your latest accounts and ten minutes.
A balance sheet shows what your business owns, what it owes and what is left for you on one date. Compare what you own with what you owe. Check you can cover the bills due this year. Then look at what changed since last year.
What is Balance Sheet and How to Work
A balance sheet is a snapshot of your business finances on the last day of your financial year. Accountants also call it the statement of financial position.
Your profit and loss account works like a film of the whole year. The balance sheet is a single photo taken at the end.
Why it always adds up
Everything your business owns was paid for by someone. You put money in, a lender did, or profits paid for it. So what you own always equals what you owe plus what belongs to you.
Accountants write this as assets = liabilities + equity. If the two sides don’t match, there’s a mistake in the books.
The Five Blocks You’ll See on Every UK Balance Sheet
UK company accounts follow a set order under the Companies Act 2006. Learn the five blocks and you can find any figure in seconds.
What you keep for the long run
These are fixed assets: vans, tools, machinery and computers. Their value drops each year through depreciation. That’s why a van you bought two years ago shows less than you paid.
What turns into cash soon
These are current assets: stock, debtors and cash at bank. Debtors are customers who owe you for work you’ve already invoiced.
What you must pay within 12 months
Look for “creditors: amounts falling due within one year”. This covers supplier bills, your overdraft, and VAT, PAYE and Corporation Tax owed to HMRC.
What you pay back over years
These are creditors due after more than one year. For most small firms, that means a bank loan or van finance.
What belongs to the owners
This is capital and reserves. It’s your share capital plus every pound of profit kept in the business since day one. It always matches the net assets figure above it.
Want a tax advisor Leeds owners can sit down with in person? Contact us to book your walkthrough today.
Meet Our Example Business: A Yorkshire Joinery Firm
Aire Valley Joinery Ltd is a made up firm with a workshop off Kirkstall Road in Leeds. It fits kitchens and staircases across Horsforth, Headingley and Bramley. Turnover rose from £230,000 to £250,000 this year.
Here’s its balance sheet at 31 March.
Aire Valley Joinery Ltd | This year £ | Last year £ |
|---|---|---|
Fixed assets (van, tools, machinery) | 38,000 | 44,000 |
Stock (timber and fittings) | 14,000 | 9,000 |
Debtors | 41,000 | 28,000 |
Cash at bank | 12,000 | 26,000 |
Total current assets | 67,000 | 63,000 |
Trade creditors | (15,000) | (14,000) |
Owed to HMRC | (18,000) | (11,000) |
Net current assets | 34,000 | 38,000 |
Total assets less current liabilities | 72,000 | 82,000 |
Bank loan due after one year | (20,000) | (36,000) |
Net assets | 52,000 | 46,000 |
Share capital | 100 | 100 |
Profit and loss reserve | 51,900 | 45,900 |
Capital and reserves | 52,000 | 46,000 |
We’ll use these figures for every question below.
Does My Business Own More Than It Owes?
Find the net assets line. Aire Valley has £52,000, up from £46,000. The business owns £52,000 more than it owes, and that gap grew this year.
Negative net assets mean you owe more than you own. It isn’t illegal. Many new companies start this way when the director lends them money. Still, it’s worth a chat with your accountant.
Net assets also isn’t the price a buyer would pay. Your reputation and loyal customers never appear on the page.
Can I Pay the Bills Coming Up This Year?
Check net current assets. That’s current assets minus bills due within 12 months. Aire Valley has £34,000 left over, so it can cover its short term bills.
The current ratio check
Divide current assets by bills due within a year. For Aire Valley, £67,000 ÷ £33,000 = 2.0. Between 1.5 and 2 is usually comfortable for a trading business. Below 1 means your upcoming bills are bigger than the money coming in.
The stock test
Timber in the workshop can’t pay a supplier tomorrow. So take stock out and divide again. (£67,000 minus £14,000) ÷ £33,000 = 1.6. That’s still healthy.
How Long Are My Customers Taking to Pay Me?
Use debtor days: debtors ÷ turnover × 365. Aire Valley’s figure is £41,000 ÷ £250,000 × 365 = 60 days. Last year it was 44 days.
In our experience, joiners and builders across West Yorkshire often wait on main contractors. The terms say 30 days. The money lands after 60. That gap is where cash goes missing.
How Much Do I Owe HMRC Right Now?
Aire Valley owes HMRC £18,000, up from £11,000. A rising tax balance often means VAT money got spent on running costs.
If a payment will be late, contact HMRC before the deadline. It may agree a Time to Pay arrangement that spreads the bill.
How Much Have I Borrowed, and Is That a Problem?
Aire Valley owes £20,000 after one year, down from £36,000. Divide that by net assets: £20,000 ÷ £52,000 = 38%. Accountants call this gearing.
Borrowing for a van that earns money makes sense. Borrowing to cover wages every month is a warning sign.
Can I Safely Pay Myself a Dividend?
Dividends can only come from profits kept in the business. You’ll find this in the profit and loss reserve. Aire Valley has £51,900, so on paper it can pay one.
Now look at the bank. Only £12,000 sits there, with £18,000 owed to HMRC. Reserves are not cash. A big dividend now would leave the tax bill unpaid.
Where your director’s loan account hides
Money you take that isn’t salary or dividends counts as a director’s loan. If you owe the company, it shows under debtors. If the company owes you, it sits under creditors.
An overdrawn loan left unpaid nine months after the year end can trigger section 455 tax at 33.75%. GOV.UK explains the director’s loan rules.
Comparing This Year With Last Year: What Changed and Why
Aire Valley made a profit, yet cash fell from £26,000 to £12,000. The balance sheet shows where it went:
£13,000 more tied up in unpaid invoices
£5,000 more timber stacked in the workshop
£16,000 paid off the bank loan
Owing HMRC £7,000 more softened the drop. The profit was real. It just went into invoices, timber and the loan.
Warning Signs Your Accountant Would Spot First
Net assets below zero
Cash falling while sales grow
Stock building up with no busy season ahead
Debtor days rising year after year
A growing HMRC balance
An overdrawn director’s loan
An overdraft used every month, not just in quiet spells
Balance Sheet, Profit and Loss, and Cash Flow: How the Three Fit Together
Statement | What it shows | Time covered | Question it answers |
|---|---|---|---|
Profit and loss account | Income minus costs | The whole year | Did I make money? |
Balance sheet | What you own and owe | One day | Where is the money now? |
Cash flow statement | Cash in and out | The whole year | Where did the cash go? |
Most small companies don’t produce a cash flow statement. Comparing two balance sheets, as we did above, tells you much of the same story.
If You’re a Sole Trader: What Changes on Your Balance Sheet
There’s no share capital. Instead, you have a capital account. It shows money you put in, plus profit, minus your drawings.
Many Kirkgate Market traders and self employed tradespeople never see one, because HMRC doesn’t ask for it. A self assessment tax return accountant can still prepare one. It helps when you apply for a mortgage or business finance.
What Banks, Buyers and Investors Look at on Your Balance Sheet
Lenders on Park Row check net assets, borrowing levels and whether your HMRC payments are up to date. Buyers look closely at stock quality and how old your unpaid invoices are. Public sector frameworks such as YORbuild usually ask for two years of accounts before you can bid.
Balance Sheet Words Decoded
Accruals: costs you’ve run up but haven’t been billed for yet.
Book value: what an asset is worth in your accounts after depreciation.
Creditors: people and organisations you owe money to.
Debtors: customers who owe you money.
Net assets: everything you own minus everything you owe.
Prepayments: costs paid now that cover a later period, like insurance.
Reserves: profits kept in the business over the years.
Frequently Asked Question
Where is turnover on the balance sheet?
It isn’t there. Turnover appears on your profit and loss account.
Can I see a competitor’s balance sheet?
Yes, if they’re a limited company. Search their name free on the Companies House register. Small firms often file a short version without their profit figure.
What does “called up share capital not paid” mean?
You haven’t yet paid the company for your shares. It’s often just £1 or £100.
Who signs the balance sheet?
A director signs it for the board. By signing, you confirm the accounts give a true and fair view. GOV.UK sets out the filing rules.
How often should I check it?
Every quarter at the very least. Monthly management accounts give you a fresh balance sheet every month.
Get Your Balance Sheet Explained by SAS Yorkshire
You now know how to read a balance sheet and which questions to ask. The next step is looking at your own.
Book a 30 minute walkthrough with our team. We’ll go through your figures line by line and flag anything that needs action. We work with owners across Leeds, Bradford, Wakefield, Huddersfield, York and Sheffield.
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