Balance sheet: what it is, structure and how to read it

The balance sheet is one of the most important accounting documents for any company. It reflects the financial position at a given point in time, showing what the company owns, what it owes and the net value of the business.

What is a balance sheet

The balance sheet, also known as the statement of financial position, is a financial statement that shows the economic and financial situation of a company at a specific date. It comprises three main blocks: assets, liabilities and equity.

This document is mandatory for all companies that keep accounts and must be submitted together with the profit and loss account as part of the annual accounts.

The fundamental equation of the balance sheet is:

Assets = Liabilities + Equity

This equation must always hold, since everything the company owns (assets) is financed either by its own resources (equity) or by external resources (liabilities).

Structure of the balance sheet

Assets

Assets include all the goods and rights owned by the company. They are divided into two main categories:

• Non-current assets: goods and rights that remain in the company long-term (more than one year). These include tangible fixed assets (machinery, buildings, vehicles), intangible fixed assets (patents, licences, goodwill) and long-term financial investments.
• Current assets: goods and rights expected to be converted into cash within one year. These include inventories, trade receivables, short-term financial investments and cash.

Liabilities

Liabilities reflect all the obligations and debts the company has with third parties:

• Non-current liabilities: long-term debts and obligations (more than one year), such as bank loans, bond issues or long-term provisions.
• Current liabilities: short-term debts and obligations (less than one year), such as suppliers, creditors, tax liabilities or credit lines.

Equity

Equity represents the company's own resources, the portion of assets financed by the shareholders or generated by the business itself. It includes:

• Share capital: contributions from the shareholders.
• Reserves: retained profits from previous years.
• Result for the period: the current year's profit or loss.
• Grants, donations and bequests: non-refundable resources received.

How to interpret a balance sheet

To analyse a balance sheet correctly, it is essential to calculate a number of ratios and key figures:

Working capital

Working capital is calculated as the difference between current assets and current liabilities. If positive, it indicates that the company can meet its short-term debts with its most liquid assets.

Debt ratio

This measures the proportion of debt relative to equity. A high ratio may indicate excessive reliance on external financing, while a low ratio reflects greater financial strength.

Liquidity ratio

This compares current assets with current liabilities. A value greater than 1 indicates that the company has the capacity to cover its immediate payment commitments.

Solvency ratio

This relates total assets to total liabilities. A value greater than 1 means the company has more assets and rights than debts, indicating solvency.

Types of balance sheet

Depending on the size of the company, there are three balance sheet formats:

• Standard balance sheet: mandatory for companies that exceed certain thresholds for assets, turnover or number of employees.
• Abbreviated balance sheet: available for companies that do not exceed two of the three thresholds for two consecutive years.
• SME balance sheet: a simplified format for small and medium-sized enterprises that meet the requirements of the SME General Chart of Accounts.

When is the balance sheet prepared

The balance sheet must be prepared at least once a year, at the close of the financial year. However, it is advisable to review it more frequently (monthly or quarterly) to maintain continuous control of the business's financial health.

The annual accounts, including the balance sheet, must be filed with the Commercial Registry within six months of the end of the financial year.

How to prepare a balance sheet with Holded

With accounting software like Holded, the balance sheet is generated automatically from the recorded journal entries. This eliminates manual errors and allows you to check your company's financial position in real time.

Holded allows you to:

• Generate the balance sheet at any time with a single click.
• Compare balance sheets from different periods to analyse trends.
• Export the balance sheet in PDF or Excel format to share with advisors or partners.
• Comply with the annual accounts filing obligations.