At a time when HMRC is wondering how it can check tax agent's competence, surely the answer is in the balance sheet?
A balance sheet can be a really useful report for any business. It provides a snap-shot of the state of the business at its year end. However, as part of the double-entry bookkeeping system, a balance sheet also provides evidence that the accounts balance, or that they have been made to balance.
A balance sheet also:
- Gives the owner a way of comparing its results and net worth year on year.
- Can be used to analyse results, indicate potential problems such as a build of stock or debtors.
- Shows how capital is employed and how much cash the owner withdraws from the business.
There is no legal requirement for an unincorporated business to prepare a balance sheet, for tax or any other reason. It may also not be cost effective to prepare one for a very small business. Conversely, some business owners will never understand the point of a balance sheet; most non-accountants struggle to read any meaning from one.
To decide whether to prepare a balance sheet consider:
- The size of the business.
- The cost of the extra work in preparing a balance sheet.
- The benefits of having a balance sheet year on year.
- Tax risk (see the Tax Risk Review).
If the business has fixed assets, debtors and creditors, a separate bank account, or a cash control account it is generally easier to create a balance sheet to reconcile and keep track of opening and closing balances.
