What is this page telling me?
Open your accounts and you will find a page of figures with headings like "creditors: amounts falling due within one year". It looks like a foreign language. It is doing something simple.
The balance sheet is a photograph of your company on one day, the last day of your accounting year. It answers three questions in order: what does the company own, what does it owe, and what is the difference. That difference belongs to the shareholders, which for most small companies means you.
The profit and loss account, on the other page, covers the whole year. The balance sheet covers one moment.
Line by line, from the top
The headings come in a set order, and you cannot rearrange them. Take them one at a time.
Fixed assets
Things your company bought to keep and use: a laptop, tools, a van, machinery, office fit-out. Not the stock you sell, and not your cash.
The figure shown is what they cost, less the wear and tear counted so far. A £2,000 laptop bought two years ago might sit here at £800. It is a book figure, not what you would get for it on eBay.
Current assets
Everything the company owns that is cash, or turns into cash within a year. Your accounts usually split this into two lines:
- Cash at bank and in hand: the balance in the business account on your year end date, plus any petty cash.
- Money owed to the company: invoices you have sent that nobody has paid yet, sometimes called debtors.
An unpaid invoice counts as something your company owns. You did the work, the money is yours, it just has not landed yet.
Creditors: amounts falling due within one year
Money your company owes and has to pay within the next twelve months. Supplier bills you have not paid, your Corporation Tax bill, a credit card balance, VAT you have collected and not yet handed over.
This is the line people find most alarming, because the tax bill sits here even though you have not paid it. That is right. You owe it on the year end date, so it belongs on the photograph.
Net current assets
Subtraction, nothing more: current assets minus the bills due within a year. If your accounts print "net current liabilities" instead, the figure came out negative, meaning short-term bills are bigger than the cash and unpaid invoices behind them. Worth knowing about, and worth a conversation if it stays that way.
Total assets less current liabilities
Fixed assets plus the net current assets figure above it. One running total on the way down the page.
Creditors: amounts falling due after more than one year
The same idea as the earlier creditors line, for money you will not have to pay for over a year: a bank loan with three years to run, finance on a van. Bills get split into soon and later because a bill due next month and a bill due in 2029 are not the same problem.
Net assets
What is left when everything the company owes comes off everything it owns. Some accounts label this line "total shareholders' funds". Same figure, same meaning: the company's worth on paper.
Capital and reserves
The bottom block, and it matches net assets to the penny. Two lines, usually:
- Called up share capital: what the shareholders put in for their shares at the start. For most small companies this is £1 or £100 and it never moves again.
- Profit and loss account: every pound of profit the company has ever made, less every pound of tax paid and every dividend taken out. It builds up year after year. Some accounts call it retained earnings.
The lines you might also see
Depending on your accounts, a few extra headings can appear: money paid in advance for something you have not had yet, money set aside for a bill you know is coming but cannot pin down, or income you have been paid for work you have not done. Money paid in advance counts with the things the company owns, and the other two count with the things it owes, so they join the same subtractions. There is also a line at the very top for share money the shareholders promised but never paid in, which for almost every small company sits at zero. If yours are blank, ignore them.
Where does a director's loan go?
This one confuses more directors than any other line, because it can appear on either side of the page.
- You owe the company money. You took cash out that was not salary, a dividend, or an expense repayment. That is money owed to the company, so it sits with your current assets, alongside your unpaid invoices.
- The company owes you money. You put your own cash in to cover a bill, or you have not drawn pay you are owed. That is a creditor, sitting with the other bills, in the "within one year" line if the company could repay you inside a year and in the "after more than one year" line if not.
Same account, two directions, two different places on the page. If the arrow points at you owing the company, there can be a tax cost, and that is its own subject.
A worked example in pounds
One company, one year end. Every figure is made up, and the shape is the shape yours will have.
| Line | Amount |
|---|---|
| Fixed assets (laptop and camera, after wear and tear) | £3,000 |
| Current assets: cash at bank | £12,400 |
| Current assets: money owed to the company (unpaid customer invoices) | £2,600 |
| Current assets total | £15,000 |
| Creditors: amounts falling due within one year (unpaid supplier bills £2,200, Corporation Tax £4,300) | £6,500 |
| Net current assets (£15,000 less £6,500) | £8,500 |
| Total assets less current liabilities (£3,000 plus £8,500) | £11,500 |
| Creditors: amounts falling due after more than one year (bank loan) | £3,000 |
| Net assets (£11,500 less £3,000) | £8,500 |
| Capital and reserves: called up share capital | £100 |
| Capital and reserves: profit and loss account | £8,400 |
| Capital and reserves total | £8,500 |
Net assets £8,500. Capital and reserves £8,500. That match is the whole point.
Now add a director's loan. Say you take £1,500 out of the company that is not pay, a dividend, or an expense repayment. Cash at bank drops to £10,900 and money owed to the company rises to £4,100, so current assets are still £15,000 and net assets are still £8,500. The company has not earned or lost anything, the same £1,500 has just moved from one line to another. Flip it, and you put £1,500 of your own money in instead: cash at bank goes to £13,900, current assets to £16,500, and creditors due within one year to £8,000, so net assets are again £8,500. One loan, opposite ends of the page, and it balances either way.
Why does it always balance?
Because the bottom half is not a second set of facts. It is the top half, worked out a different way.
Everything the company owns had to come from somewhere: money the shareholders put in, profit the company kept, or money someone lent it. Take the borrowed part off what the company owns, and what remains is what the shareholders put in plus what the company kept. That is capital and reserves. The two halves are the same number arrived at from two directions, so a balance sheet that does not balance means a figure is wrong.
If net assets come out negative, the company owes more than it owns. That happens in a first trading year and it is not automatically a crisis, but it is worth a proper conversation rather than a shrug.
Do I have to understand this to file?
No. A director approves and signs the accounts, so the figures are yours to stand behind, and you should be able to follow what each line says. Working the lines out is a different job.
How SimpleReturns handles it
You give us your year's money in and out. We work out every line above, put each figure under the right heading in the right order, check that the two halves match, and show you the finished balance sheet in plain English before anything goes to Companies House or HMRC. If a director's loan is in there, we ask you which way it points and put it on the correct side.
Want to know what the accounts are and which rulebook yours follow? That is the FRS 105 guide. Want to know whether your company is small enough to use it? That is Does my company count as a micro-entity?