Most business owners are familiar with profit and loss — but the balance sheet is equally important and often overlooked. Here’s a clear explanation of what it shows, how to read it and why it matters.
What Is a Balance Sheet?
A balance sheet is a snapshot of your business’s financial position at a specific point in time. It shows what your business owns (assets), what it owes (liabilities) and the difference — which is your business’s net worth or equity.
💡 Key takeaway
The £1,000 trading allowance means you pay no tax on the first £1,000 of self-employment income — but you can’t also claim expenses against that income.
Assets
Assets are everything your business owns that has value. Current assets include cash, debtors (money owed to you) and stock. Fixed assets include equipment, vehicles and property. The total of all assets gives you one side of the balance sheet.
Liabilities
Liabilities are everything your business owes. Current liabilities include creditors (money you owe suppliers), PAYE and VAT due, and short-term loans. Long-term liabilities include mortgages and hire purchase agreements.
Equity
Equity is assets minus liabilities — essentially the net worth of the business. For a sole trader this is called capital. For a limited company it includes share capital and retained profit. The balance sheet always “balances” — assets always equal liabilities plus equity.
Why Your Balance Sheet Matters
Banks and investors use your balance sheet to assess financial health. A strong balance sheet — with more assets than liabilities — signals a financially stable business. Your bookkeeper produces a balance sheet as part of regular management accounts.
Frequently Asked Questions
How is a balance sheet different from a P&L?
A P&L shows income and expenses over a period. A balance sheet shows the financial position at a point in time. Both are produced by your bookkeeper as part of monthly management accounts.
Do sole traders need a balance sheet?
Not legally — sole traders are only required to keep income and expenditure records. However a balance sheet is still useful for understanding the overall financial health of your business.
How often should I see my balance sheet?
Monthly is ideal — it gives you visibility of cash, debtors, creditors and overall financial health. Your bookkeeper can produce this as part of regular management accounts.
