A balance sheet can be a useful report for all but the smallest of businesses. It provides a snapshot of the state of the business at its year-end. As part of the double-entry bookkeeping system, a balance sheet also provides evidence that the accounts balance, or that they have been made to balance.

A balance sheet also:

• Gives the owner a way of comparing his results and net worth year-on-year.
• Can be used to analyse results, indicate potential problems such as a build of stock or debtors.
• Shows how capital is employed and how much cash the owner withdraws from the business.

There is no legal requirement for an unincorporated business to prepare a balance sheet for tax or any other reason. It may also not be cost-effective to prepare one for a very small business. Conversely, some business owners will never understand the point of a balance sheet; most non-accountants struggle to read any meaning from one.

To decide whether to prepare a balance sheet consider:

• The size of the business.
• The cost of the extra work in preparing a balance sheet.
• The benefits of having a balance sheet year on year.
• Tax risk (see the Tax Risk Review).

If the business has fixed assets, debtors and creditors, a separate bank account or a cash control account, it is generally easier to create a balance sheet to reconcile and keep track of opening and closing balances.