What Is A Balance?

A balance sheet is an overview of assets and receivables on the one hand and debts and equity on the other. So-called balance sheet items are included on both sides. These items are, as the word says, in balance. The right and left sides of a balance are added in the same amount.

A balance always gives a snapshot. Usually, the financial situation is on 31 December.

What is on a balance sheet?

On a balance sheet you can come across the following terms:

Debit and credit

Debit and credit are two terms that are often above a balance. The account is on the left and is derived from the Latin word for ‘must.’ Credit is on the right and is derived from the Latin word for ‘entrustment.’

Debit originally means as much as ‘he has to pay’ and credit as much as ‘he borrows.’ This immediately gives a hint of the place of your debtors (the parties from whom you still receive money) and of your creditors (the people or organizations that you still have to pay).

Assets and liabilities

The balance sheet items on the left are the assets. Here are all your possessions, such as money, goods, and assets. Outstanding receivables from debtors are also a possession. You can ever collect it.

The balance sheet items on the right are the liabilities. This includes the financial obligations, such as your debts. You have to pay for it once.

The difference between your liabilities and assets is your equity. This can be positive or negative. In doing so, you put the equity capital right under your responsibilities, so that your balance is always in balance.

Non-material assets can also be included on the balance sheet as assets. For example a permit, goodwill or patent. It is only trying to express these things in money.

Income statement

With a profit and loss account, you write off depreciations actively. You do not do this with a balance sheet. You just set the value for goods on which you write off each year for a lower amount on the balance sheet.

Suppose the entrepreneur’s inventory from the example was written off in five years. Then the inventory for next year for € 80,000 on balance. The € 20,000 can be deducted from your equity, or you make a pot with reservations that you place under the liabilities on your balance sheet.

Types of assets and liabilities

There are two types of assets and liabilities:

  1. Fixed assets

Fixed assets are items that have been tied to your company for more than a year, such as your business premises, machines, company cars, and inventory. Your formation expenses, purchase amounts, participation, and permits are also covered by fixed assets.

  1. Current assets

Current assets are assets that you could redeem within a year. These are, for example, your inventories, receivables (the statutory payment term is less than one year) and investments for a short time, such as securities and your cash and cash equivalents, or what you have in stock. Prepaid expenses as VAT also include current assets.

Liabilities are divided into three types:

  1. Own funds

Equity is what you have put yourself in the business, profit or loss, reserves and any subsidiaries. If you have a BV, the value of the shares and any share premium (the difference in cost between what is paid and the current rate) also fall under equity.

  1. Short loan capital

Short loan capital concerns short-term debts that you have to pay within one year. Think, for example, of salaries for your staff or taxes.

  1. Long loan capital

Long-term debt consists of debts that last longer than a year, such as a business loan or a mortgage. Other liabilities include the group equity (the assets of a legal entity), subordinated loans and provisions, such as the reservations for your pension or insurances.