Business Finance
Balance Sheet Explained: Assets, Liabilities and Equity
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- FinReady SA
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- 3 min read
The short answer
A balance sheet is a snapshot of what a business owns (assets), what it owes (liabilities) and what belongs to the owners (equity) on a specific date. It always balances because assets = liabilities + equity. Funders read it to judge whether a business can meet short-term obligations and how much debt it already carries.
On this page
The accounting equation
Key takeaway
Assets = Liabilities + Equity. Everything the business owns was paid for either by borrowing (liabilities) or by the owners and retained profits (equity).
Assets
Current assets
- Cash and bank balances
- Accounts receivable (debtors): customers who owe you
- Inventory (stock): goods held for sale or raw materials
- Prepayments: amounts paid in advance, like annual insurance
- VAT refunds due from SARS
Current assets are expected to turn into cash within 12 months.
Non-current (fixed) assets
Long-term assets used to run the business: vehicles, equipment, furniture, property, software. They are shown at cost less accumulated depreciation.
Liabilities
Current liabilities
- Accounts payable (creditors): suppliers you owe
- Overdraft and credit card balances
- VAT, PAYE and UIF owed to SARS
- The portion of loans due within 12 months
- Customer deposits received for work not yet done
Long-term liabilities
Loans and asset finance due after 12 months, and loans from shareholders or directors if not repayable soon.
Equity
Equity is the owners' stake: share capital or member contributions, plus retained earnings (accumulated profits not paid out), minus accumulated losses. If equity is negative, liabilities exceed assets, which lenders treat as a serious warning.
Example: a Pretoria electrical contractor at 28 February
- Cash: R85,000
- Debtors: R210,000
- Stock (cable, fittings): R60,000
- Bakkies and tools (after depreciation): R390,000
- Total assets: R745,000
- Creditors: R95,000
- SARS (VAT and PAYE owed): R42,000
- Vehicle finance: R260,000 (R70,000 due within 12 months)
- Total liabilities: R397,000
- Equity (share capital R1,000 + retained earnings R347,000): R348,000
R745,000 assets = R397,000 liabilities + R348,000 equity. Hypothetical figures.
Working capital
Working capital = current assets - current liabilities. In the example, current assets are R355,000 and current liabilities R207,000 (creditors, SARS and the R70,000 current portion of the loan), so working capital is R148,000. Positive working capital suggests short-term bills can be met. The current ratio (current assets ÷ current liabilities) here is about 1.7.
Debtors, creditors and stock in practice
- Debtors growing faster than sales may mean customers are paying later
- Old debtors (over 90 days) may never pay and may need writing off
- Creditors growing fast may mean you are stretching suppliers
- Slow-moving stock ties up cash and may be worth less than its cost
Loans and retained earnings
Loans show what you still owe, not what you borrowed originally. Retained earnings grow when you make a profit and keep it in the business, and fall when you make losses or pay dividends. Owner drawings in a sole proprietorship reduce the owner's capital.
Common interpretation mistakes
- Reading cash in the bank as profit
- Ignoring the current portion of long-term loans
- Assuming all debtors will pay in full
- Valuing equipment at what you paid rather than its depreciated value
- Looking at one balance sheet instead of comparing dates
The balance sheet works alongside the profit and loss statement and cash flow statement. Together they form the core of management accounts.
Frequently asked questions
About FinReady SA
FinReady helps South African businesses organise financial information and prepare clearer draft management information for business decision-making and professional review. Our guides explain the paperwork behind funding, tenders and everyday business finance in plain language.
FinReady provides educational information and tools that help businesses organise financial information. It does not replace professional accounting, tax, legal, audit or financial advice. Requirements differ between institutions and circumstances.