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.

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