A balance sheet is a photograph of your company taken on one day: the last day of its financial year. It shows what the company owns, what it owes, and what is left over for the shareholders.
For a micro-entity it is also, in most cases, the only document the public sees. Your profit and loss account stays off the public register today — and can stay off after April 2028 if you opt out. The balance sheet goes on the register.
So it is worth being able to read your own. Here is how it is built, why it balances, and the one line that gets misread more than any other.
The one equation
Everything on a balance sheet follows from a single relationship:
Assets − Liabilities = Capital and reserves
What the company owns, minus what it owes, equals what belongs to the shareholders. Rearrange it and you get the version accountants use:
Assets = Liabilities + Capital and reserves
Both sides describe the same money from two directions: what the company has, and where it came from. That is why they are always equal. It is not a check — it is arithmetic.
Assets: what the company owns
| Category | What it covers |
|---|---|
| Fixed assets | Things kept and used for more than a year — equipment, vehicles, computers, property, and intangibles like goodwill or software licences. Shown net of accumulated depreciation |
| Current assets | Things expected to turn into cash within a year — cash at bank, money owed by customers (trade debtors), stock, short-term deposits |
| Prepayments and accrued income | Costs paid in advance for a future period, and income earned but not yet invoiced |
Under FRS 105 these appear as single lines. “Fixed assets” is one figure with no breakdown between tangible and intangible. “Current assets” is one figure with no split between cash, debtors and stock. That is the price of the short format.
Liabilities: what the company owes
| Category | What it covers |
|---|---|
| Creditors: amounts falling due within one year | Trade suppliers, Corporation Tax, VAT, PAYE, credit cards, an overdrawn bank facility, an overdrawn director’s loan account |
| Creditors: amounts falling due after more than one year | Bank loans and finance agreements running beyond twelve months |
| Provisions for liabilities | Amounts set aside for obligations that are probable but uncertain in timing or amount |
| Accruals and deferred income | Costs incurred but not yet invoiced to you, and income received in advance of the work |
The one-year split is the important one. It tells a reader whether the company can meet its obligations from what it holds now.
Capital and reserves: what belongs to the shareholders
| Line | What it means |
|---|---|
| Called up share capital | The nominal value of shares issued. For most owner-managed companies this is £1 or £100 |
| Share premium account | Anything paid for shares above nominal value |
| Profit and loss account | Accumulated profits since incorporation, less dividends paid and losses made. Usually the largest number here |
The profit and loss account line is a running total, not this year’s profit. A company that made £40,000 this year and paid £30,000 in dividends adds £10,000 to it.
If this section is negative, the company has net liabilities — it owes more than it owns. That is not automatically fatal, particularly where a director has lent the company money, but it is the first thing a lender looks at, and it raises questions about whether dividends were lawfully paid.
A micro-entity balance sheet, read line by line
FRS 105 Format 1 in practice, for a small consultancy:
| Line | £ | |
|---|---|---|
| A | Called up share capital not paid | – |
| B | Fixed assets | 6,000 |
| C | Current assets | 74,000 |
| D | Prepayments and accrued income | 1,500 |
| E | Creditors: amounts falling due within one year | (31,500) |
| F | Net current assets | 44,000 |
| G | Total assets less current liabilities | 50,000 |
| H | Creditors: amounts falling due after more than one year | (10,000) |
| I | Provisions for liabilities | – |
| J | Accruals and deferred income | (1,200) |
| K | Capital and reserves | 38,800 |
Working through it:
- Net current assets (F) is C plus D minus E: £74,000 + £1,500 − £31,500 = £44,000. This is the liquidity line. Positive means the company can cover the next twelve months from what it already holds
- Total assets less current liabilities (G) adds fixed assets back: £6,000 + £44,000 = £50,000
- Capital and reserves (K) deducts the longer-term items: £50,000 − £10,000 − £1,200 = £38,800
Split out, K reads: called up share capital £100, profit and loss account £38,700.
That £38,800 is the company’s net assets — the shareholders’ stake.
The line everyone misreads
For the micro-entity size test, “balance sheet total” does not mean net assets. It means total assets, before deducting a single liability. Section 384A(6) of the Companies Act defines it as the aggregate of the amounts shown as assets.
In the example above:
| Measure | £ |
|---|---|
| Balance sheet total (total assets) — B + C + D | 81,500 |
| Net assets — capital and reserves | 38,800 |
The size-test figure is £81,500, not £38,800. Well under the £500,000 limit either way here — but scale it up and the difference decides your regime.
A property-holding company with £780,000 of assets and a £700,000 mortgage has a balance sheet total of £780,000, not £80,000. It is over the micro-entity limit on that test, despite modest net assets. Directors who work from the bottom line reach the wrong answer, file the wrong accounts, and only find out when Companies House rejects them.
For financial years beginning on or after 6 April 2025 the micro-entity limits are turnover not more than £1 million, balance sheet total not more than £500,000, and not more than 10 employees. You need to meet at least two of the three — and, after your first financial year, you need to meet them in that year and the year before, under section 384A(3) of the Companies Act 2006.
Five things to check on your own balance sheet
1. Is net current assets positive? If current liabilities exceed current assets, the company owes more in the next twelve months than it holds. Look at why.
2. What is the director’s loan account doing? The company owing you is fine; you owing the company is the issue. An overdrawn balance still outstanding nine months after the year end can trigger a tax charge on the company.
3. Is the profit and loss reserve big enough for the dividends you took? Dividends must come out of distributable profits. If the reserve went negative, some of what you took may not have been a lawful dividend.
4. Does cash match your expectation? Current assets include debtors, so a healthy-looking figure can be almost entirely money customers have not paid yet.
5. Do the comparatives make sense? Every balance sheet shows the prior year alongside. A line that jumps without explanation is usually a posting error.
What changes in April 2028
Micro-entities currently file the balance sheet only. From April 2028 they must also file a profit and loss account, plus an auditor’s report unless exempt. Small and micro companies will be able to opt out of publishing the P&L on the public register — Companies House, HMRC and law enforcement keep access, competitors and credit agencies do not.
From the same date all accounts must be filed using commercial software in iXBRL, and abridged accounts are abolished. The change was originally announced for April 2027 and confirmed as April 2028 on 9 June 2026.
Frequently asked questions
Why does a balance sheet have to balance?
Because both sides describe the same money. Assets minus liabilities is by definition what belongs to the shareholders, so the totals cannot differ. If they do, something has been posted incorrectly.
What is the difference between net assets and balance sheet total?
Net assets is what the company owns after deducting everything it owes. Balance sheet total, for the micro-entity size test, means total assets before deducting any liabilities. They are usually very different numbers.
Is a negative balance sheet a problem?
Negative capital and reserves means the company has net liabilities. It is not automatically fatal, especially where a director has lent money in, but it affects credit ratings, lending decisions and whether dividends can lawfully be paid. It is worth discussing with an accountant.
Does my micro-entity balance sheet show my turnover?
No. A micro-entity currently files only the balance sheet, so turnover and profit stay off the public register. That changes in April 2028, subject to the new publication opt-out.
Who signs the balance sheet?
A director signs on behalf of the board, with their name printed on it. For a micro-entity there must also be a statement immediately above the signature confirming the accounts are prepared under the micro-entity provisions. Companies House rejects accounts without both.
Getting your balance sheet right
The arithmetic is not the hard part. The judgement is: what belongs in fixed assets, how the director’s loan account is presented, whether the reserve supports the dividends taken, and which regime the company should be filing under.
SmartFiling prepares and files micro-entity accounts from £299, covering FRS 105 accounts, the CT600, iXBRL tagging and submission to both Companies House and HMRC. Every filing is reviewed and signed off by an ICAEW Chartered Accountant, with a seven working day turnaround from receiving your records.
