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A Guide to Bookkeeping : Balance Sheets & Financial Statements

As your business grows, it’s sensible to keep your finger on the pulse of money coming in and out, and consistent financial statements help you do this. This financial statement guide will introduce some essential bookkeeping and accounting principles to help you understand the different kinds of statements and their purposes.

What are Financial Statements ?

A financial statement is a document which describes the ‘health' of your business’s current financial position regarding assets, liabilities and equity. They are useful for business owners to understand risks and are also used by investors who want to assess a company’s condition. There are various types of financial statement, each of which has a different purpose.

Financial statements were traditionally created manually using pen and paper or spreadsheets, but modern businesses increasingly use accounting software to quickly create reports and eliminate mistakes.

Examples of financial statements

In this guide, we’re going to explore three essential kinds of financial statements :

  • Balance sheet : your business’s current ‘net worth’.
  • Trial balance : to discover if there are any errors in your accounting.
  • Profit and loss statement : the revenues, costs and expenses incurred over a specific period.

Software to help manage your cash flow and stay compliant

Sage Accounting Software helps you monitor and keep track of your cash position, allowing you to focus on what matters the most to you.

  • Solutions catering to start-ups, small and growing businesses
  • Easily manage your accounts and business processes
  • Remain compliant to local legislations

What are Balance Sheets?

A balance sheet gives you a detailed breakdown of all your current assets (cash, goods you hold), liabilities (debt, salaries to pay) and equity (how much the business owner and investors hold in the business). It’s a highly useful form of financial accounting, as once the sum of equity and liabilities are subtracted from your assets, the remaining number tells you your business’s current value.

The Purpose of Balance Sheets

  • It helps potential investors understand how risky it is to invest in a business; one that has high levels of debt, for instance, might not be so attractive.
  • It helps existing investors monitor the health of the business and decide whether to sell their shares.
  • It helps the business owner review the company’s current financial structure, discover problems (such as being heavily in debt) and implement solutions.

Balance Sheet Formats

There are various ways you can format a balance sheet, but the most common approach is to use a ‘classified balance sheet’ where different subcategories of accounts are consolidated for ease of understanding. Below is a typical balance sheet format:

Assets Value
Cash 25,000 SGD
Equipment 15,000 SGD
Inventory 50,000 SGD
Petty cash 120 SGD
Total assets 90,120 SGD
Liabilities Value
Tax 10,000 SGD
Loans 22,000 SGD
Accounts payable 15,000 SGD
Wages payable 20,000 SGD
Total liabilities 67000 SGD
Equity Value
Retained earnings 25,000 SGD
Total Equity 25,000 SGD

The Difference Between Balance and Trial Balance Sheets

Balance sheets and trial balance sheets have similar names, yet have different accounting purposes.

What is a Trial Balance Sheet?

A trial balance sheet is an internal way of ensuring your account books add up. To create the trial balance, you just need to add up all the credits and debits on your different accounts, and this should add up to the same amount for both. If there is a discrepancy between credits and debits, you now know that there has been an error in your accounting.

How is it different to a balance sheet?

A trial balance sheet is not intended for ‘public consumption' — instead, it's used by your accounting team to make sure that they are preparing other financial statements correctly and will be updated daily if not more often. On the other hand, a balance sheet is meant to be read by outsiders and is typically published at regular intervals— usually quarterly.

Trial Balance Sheet Formats

Trial balance

18 April 2018

Account name Debit SGD Credit GGD
Cash 100,000  
Equipment 30,000
Bank loan   30,000
Accounts payable 20,000  
Salaries   100,000
Utilities   20,000
Total 150,000 SGD 150,000 SGD

Profit and Loss Statements

A profit and loss statement (also known as P&L Statement, income statement or statement of operations) shows you the revenues, costs and expenses the business has incurred over a specific period— usually quarterly or yearly. By subtracting costs and expenses from revenue, you can judge the company’s ability to generate a profit.

The Different Between P&L Statements and Balance Sheets

Fundamentally, a P&L statement shows a company’s net income over a period and can show you whether this is going up or down. By contrast, a balance sheet gives you a snapshot of what a business is worth at any one time.

Profit and Loss Statement Template

Keeping an eye on your profit and loss statement helps you stay on top of your cashflow and give you warning signs as to whether the business is in trouble. It’s worthwhile entering information into your profit and loss statement the moment you receive — or spend — money. Online accounting tools allow you to do this any time, anywhere.

Here is a standard profit and loss statement template:

Tam’s Fruit Stall
Profit and Loss Statement
Q1 2018

Revenues Value Total
Fruit sales 15,000 SGD  
Revenues total   15,000 SGD
Rent 5,000 SGD  
Tax 6,000 SGD  
Transportation 1,200 SGD  
Expenses total   12,200 SGD
Net income   2,800 SGD

A finger on the pulse of your finances

Creating financial statements for your business is essential for making sure that your foundations are stable, while also helping you detect any risks on the horizon. And it’s easier than ever to create financial statements. Learn more about Sage’s accounting solutions for small and medium businesses here