Here's how to read a balance sheet: start with what the business owns (its assets), then what it owes (its liabilities), then what's left for the owners, which UK accounts call capital and reserves. A balance sheet is a snapshot of those three things on a single date, and it always balances because assets minus liabilities equals the owners' stake.
The idea really is that simple. What trips people up is the wording: debtors that turn out to be good news, creditors split by when they fall due, and a line called 'profit and loss account' that appears on the balance sheet rather than beside it. This guide walks through all of it in plain English, with a worked example of a small UK company, the three ratios worth knowing and the red flags that deserve a second look.
By the end you'll also know where to find any UK company's balance sheet for free, so you can practise on a real one: your own, a competitor's, or one belonging to a company you'd like to work for.
What is a balance sheet and what does it show?
A balance sheet is a financial statement that lists everything a business owns and owes on one particular day, usually the last day of its financial year. Think of it as a photograph rather than a film. It tells you where the business stands at that moment, not how it got there.
It rests on one equation, known as the accounting equation: assets minus liabilities equals equity. Equity is the owners' stake. Every pound of assets was paid for either by borrowing (a liability) or by the owners (equity), which is why the two halves always match.
UK company accounts have their own vocabulary for the three parts. Larger and listed companies that report under international accounting standards call the same document the statement of financial position and use slightly different words, noted below.
Assets are what the business owns or is owed. Fixed assets are kept for the long term: premises, machinery, vans, computers, and intangible assets such as software or goodwill. Current assets should turn into cash within a year: stock, debtors and cash at the bank. International accounts say non-current and current assets.
Liabilities are what the business owes. UK accounts split them by timing, as 'creditors: amounts falling due within one year' (supplier bills, tax owed, the next twelve months of loan repayments) and 'creditors: amounts falling due after more than one year' (the rest of a long-term loan, for example). International accounts say current and non-current liabilities.
Equity is what's left for the owners, shown in the UK as capital and reserves. For a limited company that usually means called up share capital, which for a small owner-managed company can be a token amount, plus retained profits. UK accounts often label those retained profits 'profit and loss account'. It means the profit kept in the business over the years rather than paid out as dividends.
The two totals at the bottom are net assets (assets minus liabilities) and shareholders' funds (capital and reserves). They're always the same number, and that's the 'balance' in balance sheet.
What are debtors and creditors on a balance sheet?
Debtors are people and businesses that owe your company money. Creditors are people and businesses your company owes. Debtors sit in current assets because they are money on its way in, and creditors sit in liabilities because they are bills to pay. Yes, the debtors are the good news. No, nobody finds that intuitive at first.
In international accounts and most accounting software, debtors are called receivables (or accounts receivable) and creditors are called payables (or accounts payable). Same thing, different label. Here's what you'll typically find inside each.
Trade debtors: customers who've been invoiced and haven't paid yet.
Prepayments: costs paid in advance, such as a year's insurance paid partway through the year, where some of the cover is still to come. These are often shown within debtors.
Other debtors: anything else owed to the company, including money lent to a director, which is worth noticing (more on that in the red flags below).
Trade creditors: suppliers who've invoiced the business and haven't been paid yet.
Taxation and social security: VAT, PAYE and Corporation Tax owed to HMRC.
Accruals: costs already run up but not yet invoiced, such as last month's electricity.
Bank loans and overdrafts: the part due within a year sits with the short-term creditors, and the rest sits further down the page.
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Here's a simplified balance sheet for Example Bakery Ltd, a small wholesale bakery that supplies local cafés on 30-day payment terms. The business is made up and so is every figure, rounded so the arithmetic is easy to follow. Real UK accounts run in the same order, from top to bottom.
The short version: the bakery owns £100,000 of assets (£60,000 fixed plus £40,000 current) and owes £55,000 (£30,000 soon and £25,000 later), so £45,000 belongs to the shareholders. Almost all of that is profit kept in the business over the years, not money the owners put in. Here are the lines that get you there.
Fixed assets: tangible assets (ovens, mixers and a delivery van) £60,000.
Current assets: stock (flour, ingredients and packaging) £5,000, debtors (cafés yet to pay) £15,000 and cash at bank and in hand £20,000, so £40,000 in total.
Creditors: amounts falling due within one year £30,000, made up of suppliers £14,000, VAT and PAYE owed to HMRC £8,000, accruals £3,000 and this year's loan repayments £5,000.
Net current assets £10,000: the £40,000 of current assets minus the £30,000 due within a year.
Total assets less current liabilities £70,000: the fixed assets plus the net current assets.
Creditors: amounts falling due after more than one year £25,000, the rest of the bank loan.
Net assets £45,000.
Capital and reserves: called up share capital £100 and profit and loss account £44,900, giving shareholders' funds of £45,000.
How to read a balance sheet in five minutes
You don't need to read every line in order. With any balance sheet in front of you, run through these checks and you'll have the shape of the business in five minutes.
Check the date and the second column. UK accounts show this year beside last year, and the change between the two columns usually tells you more than either number on its own.
Find net assets. Is the figure positive, and is it growing? Negative net assets means the business owes more than it owns.
Find net current assets, also called working capital. A positive figure means the short-term assets cover the short-term bills, and a negative one (shown as net current liabilities) means they don't. Example Bakery's £10,000 is positive, but it isn't a big cushion if two of its largest cafés paid late in the same month.
Look at the borrowing. How much is there, and how much of it falls due within the next year?
See where the money is sitting. Of the bakery's £40,000 in current assets, only £20,000 is cash. The rest is flour that has to be baked and sold, and invoices that have to be paid, before it can settle a supplier's bill.
Read the notes. The accounting policies and the notes behind debtors, creditors and loans are where the detail lives, along with anything the directors want you to know about the business's prospects.
Three balance sheet ratios worth knowing
Ratios turn raw numbers into something you can compare between years and between businesses. These three use only the balance sheet, and each takes seconds with a calculator.
Current ratio = current assets ÷ creditors due within one year. For Example Bakery that is £40,000 ÷ £30,000 = 1.33, so it has £1.33 of short-term assets for every £1 of short-term bills. Below 1, the bills are bigger than the assets meant to pay them.
Quick ratio (the acid test) = (current assets minus stock) ÷ creditors due within one year. For the bakery that is £35,000 ÷ £30,000 = 1.17. It leaves out stock because stock has to be sold before it becomes cash, which makes it the stricter test.
Gearing = total borrowings ÷ (total borrowings + shareholders' funds). The bakery owes £30,000 to the bank in total (£5,000 this year plus £25,000 later), so £30,000 ÷ £75,000 = 40%. It tells you how much of the business is funded by lenders rather than owners.
There's no universal good number for any of them. A shop that's paid at the till and pays its suppliers weeks later can run comfortably on a current ratio below 1, while a consultancy waiting two months for every invoice needs far more cushion. Gearing has more than one definition too (some analysts divide debt by equity instead), so compare like with like: a business against its own previous years, and against others in the same trade.
Red flags worth a second look
None of the signs below proves a business is in trouble. Each is a reason to ask a question before you lend it money, take a job there or sign a big contract.
Negative net assets. It can be a passing stage for a young business funded by investors or by its directors, but it's a serious question for an established one.
Net current liabilities: more due within a year than the short-term assets available to pay it.
Cash falling while creditors rise, year on year. It can mean the business is paying its own bills more slowly to stay afloat.
Debtors growing much faster than sales. Customers may be taking longer to pay, or some invoices may never be paid at all.
Large amounts owed by directors or related companies sitting in debtors. Money owed by people connected to the business isn't always as collectable as money owed by customers.
A going concern note. If the notes mention a material uncertainty about whether the business can carry on, read that note twice.
Late or missing accounts on the public record. The filing dates are visible when you look the company up.
Balance sheet vs profit and loss account and cash flow statement
The three main financial statements answer three different questions, and you need all three for the full picture.
The balance sheet asks where the business stands on one date. The profit and loss account (called the income statement in international accounts) asks whether it made a profit over a period, usually a year: sales minus costs. The cash flow statement asks where the cash actually came from and went over that period, split between trading, investing (buying a new van) and financing (taking out a loan or paying dividends).
They're connected. Profit kept in the business adds to the profit and loss reserve on the balance sheet, and the change in cash between two balance sheets is exactly what the cash flow statement explains.
That's also why profit and cash aren't the same thing. A business can make a healthy profit and still run short of cash if that profit is sitting in debtors who haven't paid or in stock that hasn't sold. The balance sheet is where you see that happening.
How to find any UK company's balance sheet for free
Every UK limited company files annual accounts at Companies House, and you can read them free. Search for the company by name or number on Find and update company information, open the filing history tab, filter by accounts and open the PDF.
For many small companies the balance sheet is all you'll find. Under the current filing rules, small companies can choose not to send their profit and loss account to Companies House, and micro-entities can send just a balance sheet with less information on it. That's changing: the government has announced that from April 2028 small companies and micro-entities will have to file their profit and loss accounts too, though they'll be able to opt out of publishing that information on the public register. Either way, the balance sheet stays the main thing anyone can see about a small business.
Two cautions before you lean on what you find. Companies House says plainly that it does not check the accuracy of the information filed, and small companies can often skip an audit, so a filed balance sheet is usually the directors' own account of the business. Read it as a strong starting point, not the final word.
Do you need a course to read a balance sheet?
Honestly, maybe not. If you just need to understand your own company's accounts once a year, an hour with your accountant and this guide may be all you need. Ask them to walk you through net current assets, the loans and any director's loan account, and write down what they say.
A course earns its place when the numbers are part of your job, or you want them to be. The Certificate in Finance Fundamentals teaches you to read and question the profit and loss, the balance sheet and the cash flow statement, and ends with a health check of a real company from its published accounts. If you'd rather understand how the figures get there in the first place, the Certificate in Accounting Fundamentals starts from double entry and builds up to a trial balance that balances.
Running your own business? The Certificate in Small Business Management covers pricing, margins and a cash flow forecast you'll keep using long after the course. Once reading statements feels easy, the Certificate in Financial Modelling in Excel has you build a linked three-statement model from a blank workbook. The rest of the range is in our business and finance courses.
Each one is a single purchase with lifetime access and a certificate employers can verify online. Not sure which fits? The free info pack sets out what each course covers, so you can decide before you spend a penny.
Good to know
Common questions
A balance sheet is a list of what a business owns, what it owes and what's left for its owners on one particular date. It always balances because assets minus liabilities equals the owners' stake. Think of it as a snapshot of the business's position, not a record of the whole year.
It shows assets (fixed assets such as equipment, and current assets such as stock, debtors and cash), liabilities (split into amounts due within one year and after more than one year) and equity, which UK accounts call capital and reserves. Together they tell you whether the business can cover its short-term bills and how it's funded.
Debtors are amounts owed to the business, mostly by customers who've been invoiced but haven't paid yet. They're shown as a current asset because the money should arrive within a year. International accounts call them receivables.
Creditors are amounts the business owes, such as unpaid supplier invoices, tax due to HMRC and loan repayments. UK accounts split them into amounts falling due within one year and amounts falling due after more than one year. International accounts call them payables.
Look for positive and growing net assets, positive net current assets and borrowing the business can comfortably carry. Then compare this year with last year and with similar businesses, because a ratio that is fine in one trade can be worrying in another. Finally, read the notes for anything the directors flag about the future.
On the Companies House register, free. Search for the company, open its filing history, filter by accounts and open the PDF. Many small companies file only a balance sheet, so it may be the only financial statement you can see.
A balance sheet is a snapshot of what a business owns and owes on one date. A profit and loss account covers a period, usually a year, and shows sales, costs and whether the business made a profit. Profit kept in the business each year flows onto the balance sheet as retained earnings.
