The balance sheet: what you own and what you owe

The profit and loss covers a year. The balance sheet is a snapshot on one day, usually 30 June. It lists what the business owns, what it owes, and the difference between the two.

Assets: what you own

Assets are things of value the business owns. On a farm that's land and buildings, livestock, plant and machinery, stored feed, cash in the bank and money owed to you. Money owed to you is called debtors. An example is a sale where the agent hasn't paid you yet.

Assets are often split into two groups. Current assets are expected to turn into cash within 12 months, like cash, debtors and stock you plan to sell. Non-current assets are kept for longer, like land and machinery.

Liabilities: what you owe

Liabilities are debts. On a farm that's term loans, the overdraft, equipment finance and bills you haven't paid yet. Unpaid bills are called creditors.

Liabilities are split the same way. Current liabilities are due within 12 months, like the overdraft, creditors and this year's loan repayments. Non-current liabilities are due later.

Equity: what's left

Equity is what you own less what you owe. If you sold everything and paid every debt, equity is roughly what would be left. Lesson 5 looks at it more closely.

Book value and market value

Here's the part that confuses people. Your accountant's balance sheet often shows assets at what they cost, less depreciation. That's called book value. Land bought 20 years ago might sit in the accounts at a fraction of what it would sell for today.

The bank cares about what assets are worth now. That's why it often asks for a separate statement of assets and liabilities at current values. Our assets and liabilities template sets one out. Use fair values you could explain, not the best price you'd hope for.

What to look for

• Is the overdraft deeper than last year? That can be a sign the business is spending more than it earns.
• How much debt is due in the next 12 months, compared with your current assets?
• Has total debt gone up or down over the last three or four years?

Look at the balance sheet next to the profit and loss. A farm that makes a profit but whose debt keeps climbing is worth a closer look. Our farm finance words card has these terms on one page.