A balance sheet is a snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity), at one point in time. The fundamental equation is Assets = Liabilities + Equity. Under UK GAAP (FRS 102), the balance sheet is called the Statement of Financial Position. Reading it well means understanding the structure, the key ratios, and the red flags.
This guide walks through balance sheet structure, a worked example, the ratios that matter, and the warning signs to watch for.
The balance sheet structure
A UK balance sheet has five main sections, in this order:
Fixed (non-current) assets
Assets the company expects to hold for more than 12 months. Sub-categories:
- Tangible assets — property, plant, equipment, vehicles
- Intangible assets — goodwill, software, trademarks, capitalised development
- Investments — shares in other companies held long-term
Current assets
Assets the company expects to convert to cash within 12 months:
- Inventory (stock) — raw materials, work in progress, finished goods
- Trade and other receivables (debtors) — money customers owe
- Cash and cash equivalents — bank balances, short-term deposits
Current liabilities (creditors falling due within one year)
Money the company owes within 12 months:
- Trade payables (creditors) — money owed to suppliers
- Accruals — costs incurred but not yet invoiced
- Tax payable — VAT, PAYE, Corporation Tax owing
- Short-term borrowings — overdraft, loans due within 12 months
Long-term liabilities (creditors falling due after one year)
Money owed beyond 12 months:
- Bank loans — term loans, mortgages
- Provisions — long-term liabilities of uncertain amount
Equity (capital and reserves)
What is left for shareholders:
- Share capital — nominal value of issued shares
- Share premium — amount paid above nominal at issue
- Retained earnings — cumulative profit kept in the business
The accounting equation: Assets = Liabilities + Equity. The two sides always balance because every transaction has a matching debit and credit entry.
Statutory format under FRS 102
UK GAAP (FRS 102) sets two permitted formats for the Statement of Financial Position. Format 1 is more common and lists assets, then liabilities, then equity. Format 2 lists by liquidity. Companies House and HMRC accept either, and accounting software handles the format choice automatically.
Micro-entities under FRS 105 use a simplified balance sheet format with less narrative.
Worked example
Here is a simplified balance sheet for a small UK company, “Example Trading Ltd”, with £500,000 turnover:
| Item | £ |
|---|---|
| Fixed assets | |
| Tangible assets (vehicles and equipment) | 80,000 |
| Intangible assets (software) | 20,000 |
| Total fixed assets | 100,000 |
| Current assets | |
| Inventory | 60,000 |
| Trade receivables | 90,000 |
| Cash | 50,000 |
| Total current assets | 200,000 |
| Total assets | 300,000 |
| Current liabilities | |
| Trade payables | 60,000 |
| Tax payable | 25,000 |
| Bank overdraft | 15,000 |
| Total current liabilities | 100,000 |
| Long-term liabilities | |
| Bank loan | 80,000 |
| Total long-term liabilities | 80,000 |
| Total liabilities | 180,000 |
| Net assets | 120,000 |
| Equity | |
| Share capital | 10,000 |
| Retained earnings | 110,000 |
| Total equity | 120,000 |
What it tells you:
- The company owns £300,000 of assets, owes £180,000, leaving £120,000 of value for shareholders
- Working capital (current assets minus current liabilities) is £100,000 — healthy
- Long-term debt of £80,000 is well-covered by net assets of £120,000
- Cash of £50,000 is enough to cover roughly half of current liabilities
For more on the income side that complements this snapshot, see how to read a profit and loss statement.
Key ratios
Five ratios you can calculate from a balance sheet:
Current ratio
Current assets ÷ current liabilities. Measures ability to meet short-term obligations.
In the example: £200,000 ÷ £100,000 = 2.0
A current ratio between 1.5 and 2.0 is generally considered healthy for SMEs. Below 1.0 means current liabilities exceed current assets and signals short-term cash strain.
Quick ratio (acid test)
(Current assets − inventory) ÷ current liabilities. Stricter than current ratio because inventory is sometimes hard to convert to cash quickly.
In the example: (£200,000 − £60,000) ÷ £100,000 = 1.4
A quick ratio above 1.0 is generally healthy.
Gearing ratio
Total debt ÷ equity. Measures leverage.
In the example: £80,000 (long-term debt) ÷ £120,000 (equity) = 0.67 or 67%
UK SME comfort range is typically up to 100% gearing. Higher gearing means more financial risk but also amplified returns.
Working capital
Current assets − current liabilities. The cushion you operate with day to day.
In the example: £200,000 − £100,000 = £100,000
Negative working capital is a warning sign for most businesses (subscription and supermarket models are exceptions).
Net asset value per share
Net assets ÷ number of shares in issue. The book value of each share.
If Example Trading Ltd has 10,000 shares in issue, NAV per share is £120,000 ÷ 10,000 = £12. This is book value — market value is usually different.
Red flags
Five warning signs:
- Negative working capital. Current liabilities exceed current assets. Often a precursor to cash flow strain.
- Negative net assets. Total liabilities exceed total assets — the company is technically insolvent on a balance sheet basis.
- Director loan account heavily drawn. Often a sign that profits are being extracted faster than they are earned, or that personal and business finances are mixed.
- Goodwill or intangibles dominating fixed assets. Concentrated risk if the goodwill is impaired.
- Trade receivables growing faster than turnover. Customers are paying more slowly, which strains cash.
Where to find your balance sheet
Three places to look:
- Companies House public file. Every UK limited company files annual accounts including a balance sheet. Search find-and-update.company-information.service.gov.uk. Note that filleted accounts hide the profit and loss but always include the balance sheet.
- Accounting software. Real-time balance sheets in Xero, QuickBooks, FreeAgent, Sage.
- Annual accounts. The shareholder-facing full version of your accounts.
Key takeaways
- Balance sheet shows assets, liabilities, and equity at a point in time
- Accounting equation: Assets = Liabilities + Equity
- Five sections: fixed assets, current assets, current liabilities, long-term liabilities, equity
- Key ratios: current ratio, quick ratio, gearing, working capital, NAV per share
- Negative working capital and negative net assets are major warning signs
- Filleted accounts hide profit and loss but always include the balance sheet
Frequently asked questions
What is the accounting equation? Assets = Liabilities + Equity. Every transaction has matching debit and credit entries, so the two sides always balance.
What is working capital? Current assets minus current liabilities. It is the short-term cushion the company operates with day to day. Positive working capital is normal; negative is a warning unless the business model deliberately runs that way.
What is a healthy current ratio? Between 1.5 and 2.0 is generally considered healthy for UK SMEs. Below 1.0 signals short-term cash strain. Above 3.0 may indicate inefficient use of working capital.
Is the balance sheet under UK GAAP the same as the Statement of Financial Position? Yes. FRS 102 calls it the Statement of Financial Position; the older term Balance Sheet remains in widespread use.
Where can I see another company’s balance sheet? On the Companies House public register. Every UK limited company files an annual balance sheet. Filleted accounts hide the profit and loss account but always include the balance sheet.
Useful resources
Companies House — Find and update company information https://find-and-update.company-information.service.gov.uk/
Financial Reporting Council — FRS 102 https://www.frc.org.uk/
GOV.UK — Annual accounts for a private limited company https://www.gov.uk/annual-accounts