Balance Sheet

Business assets are the resources your company owns or controls. They hold value because you use them to generate income. In your accounts, you split assets into two main groups. These are current assets and non-current assets. This separation follows the requirements of the Corporations Act 2001 and Australian Accounting Standards, specifically AASB 101 Presentation of Financial Statements.

Current assets are items you expect to turn into cash, sell, or use up within 12 months. The most common current asset is cash in the bank. Money owed to you by customers for work completed is called trade receivables or debtors. If you run a trade business, you likely hold inventory or stock. This includes materials on hand, such as timber, piping, or tiles, waiting to be installed. Because you plan to use these items quickly to finish jobs and get paid, you classify them as current.

Non-current assets are long-term items. You keep these for more than a year to support your operations, not to sell them immediately. For tradespeople, this usually includes property, plant, and equipment. A work van, a ute, power tools, machinery, and a workshop are typical non-current assets. Under AASB 116 Property, Plant and Equipment, you must record these items at their cost when you buy them.

Depreciation is how you record the loss of value of these non-current assets over time. Most assets, except land, wear out as you use them. They also become outdated as newer technology hits the market. You do not count this as a cash expense from your bank account. Instead, you spread the cost of the asset over its useful life. This process matches the cost of the asset against the revenue it helps generate.

For example, if you buy a utility vehicle for $60,000 and expect to use it for six years, you claim a portion of that cost each year as a depreciation expense. The Income Tax Assessment Act 1997 sets out specific rules on how to calculate this decline in value for tax purposes. You generally use either the prime cost method, which spreads the cost evenly, or the diminishing value method, which claims larger deductions in the early years. This ensures your Balance Sheet reflects the true value of your equipment.

Liabilities represent the financial obligations your business owes to other parties. In simple terms, this is the money you must pay out. On a balance sheet, liabilities are essential for calculating your net equity. You must record these debts accurately to satisfy the requirements of the Corporations Act 2001 and Australian Accounting Standards. Keeping correct records also ensures you meet your obligations under the Taxation Administration Act 1953.

Liabilities are split into two main categories based on when the debt falls due.

Current liabilities are debts you must settle within the next 12 months. For tradespeople, this usually includes trade creditors. These are the invoices you receive from suppliers for materials, hardware, and fuel. You might also have accrued expenses, which are costs you have incurred but have not yet received an invoice for, such as wages for employees or contractor fees. Another significant current liability is the GST collected on sales. You collect this on behalf of the Australian Taxation Office (ATO) through the Pay As You Go (PAYG) system. Until you remit this amount to the ATO via your Business Activity Statement (BAS), it is recorded as a liability. Short-term loans or overdrafts that must be repaid within a year also fall into this category.

Non-current liabilities, also called long-term liabilities, are debts due after more than 12 months. The most common example for a small trade business is a loan used to purchase a vehicle or a piece of heavy machinery like an excavator or a bobcat. The principal amount of the loan that is outstanding after the current year is classified here. Equipment finance and leases also belong in this section.

Managing these liabilities is critical for cash flow. You must have enough liquid assets available to pay your current liabilities when they become due. Failing to manage this can lead to insolvency. You should review your accounts payable regularly to ensure you can meet your tax commitments and supplier payments on time. Proper classification helps you understand the true financial position of your business and is vital for preparing accurate financial statements at the end of the financial year.

Equity

Equity is simply the value of the business after you subtract all the money you owe from everything the business owns. For a tradesperson or small business owner, equity represents your skin in the game. It is your net financial interest in the company.

The two main components of equity are owner's capital and retained earnings.

Owner's Capital Owner's capital, often called equity contribution, is the money you put into the business to start it or keep it running. This includes the initial cash you deposited to buy a ute and tools, or any personal funds you transfer later to cover a slow month. Under the Corporations Act 2001, company equity is often classified as share capital, but for sole traders and partnerships, it is simply the capital account. Every time you inject personal funds, your equity increases. This is distinct from a loan, because you do not pay interest on it, and you do not pay it back unless you wind up the business or withdraw funds.

Retained Earnings Retained earnings are the profits your business has kept rather than paid out to yourself. At the end of the financial year, your accountant calculates the net profit or loss. This figure moves from the profit and loss statement into the equity section of the balance sheet. If you take money out for personal use beyond your wages, these are drawings. Drawings reduce retained earnings. Conversely, if the business makes a profit and you leave it in the bank to buy a new excavator next year, that profit increases your retained earnings.

The Accounting Equation The balance sheet must always balance. This relies on the fundamental accounting equation:

Assets = Liabilities + Equity

Think of it this way. Your business assets, such as cash in the bank, inventory, and equipment, are funded by two sources. Either you borrowed the money to buy them, which are liabilities like bank loans or creditor invoices, or you put your own money in, which is equity.

If you buy a piece of machinery for $10,000 cash, your assets do not change. You lose $10,000 cash but gain $10,000 in equipment. The equation stays level.

If you take out a $10,000 loan to buy that machinery, your assets increase by $10,000. Your liabilities also increase by $10,000. The equation stays level.

If you use $10,000 of your own profit to buy the machinery, your assets increase by $10,000. Your retained earnings, which are part of equity, increase by $10,000. The equation stays level.

This balance is required under Australian Accounting Standards, specifically AASB 101 Presentation of Financial Statements, to ensure the balance sheet gives a true and fair view of your financial position.

Current Ratio Analysis

To calculate the current ratio, take your total current assets and divide them by your total current liabilities. You can find these figures on your balance sheet. Current assets are items expected to be converted into cash within 12 months, such as cash in the bank, debtors, and inventory. Current liabilities are debts due within the same period, like creditors, short-term loans, and accrued expenses. The formula is expressed as Current Assets divided by Current Liabilities.

For tradespeople and small business owners, this number is a quick health check on your business liquidity. It measures your ability to pay off short-term debts with what you own right now. A ratio of 2.0 is traditionally considered strong. This means you have two dollars of assets for every one dollar of debt. A ratio below 1.0 is a warning sign. It indicates you owe more than you own in the short term, which may lead to cash flow stress and an inability to pay suppliers or staff on time.

When you apply for a business loan, banks and financial institutions look closely at this ratio. Under the Corporations Act 2001, lenders must assess your financial position to ensure the loan is not unsuitable. A low current ratio suggests a higher risk of default. , banks may charge a higher interest rate to offset this risk or decline the application altogether. They use this ratio to predict if your business can survive an economic downturn or a sudden drop in income.

The Australian Accounting Standards Board 116 (AASB 116) sets out how to present property, plant, and equipment in financial statements, which affects your asset values. , the Australian Securities and Investments Commission (ASIC) requires accurate financial reporting to maintain market integrity. If your balance sheet does not comply with these standards, your current ratio may be incorrect, damaging your credibility with lenders.

Maintaining a healthy ratio involves managing stock levels and collecting debts promptly. If your ratio is too high, above 3.0, it might mean you are not using your assets efficiently to grow the business. You could have too much cash sitting idle or excess stock that is not moving. Keeping your ratio between 1.5 and 2.0 is generally a practical target. It shows lenders you have enough liquidity to operate comfortably while using your funds effectively.

Instructions for Maintaining a Depreciation Schedule

Maintain an accurate depreciation schedule to calculate the decline in value of your business assets. You must record this information separately for every income year to meet your obligations under the Income Tax Assessment Act 1997 (ITAA 1997).

Record Keeping Requirements You must keep written records for each asset. For every tool, vehicle, or piece of equipment, record the following details:

• Description: Make, model, and serial number.
• Cost: The total amount you paid to acquire the asset, including delivery costs and installation fees.
• Date of Acquisition: The exact date you started using the asset for business purposes.
• Effective Life: Your estimate of how long the asset will last, or the ATO estimate.
• Method: The method used to calculate depreciation (Prime Cost or Diminishing Value).

Using ATO Effective Life Estimates The Australian Taxation Office (ATO) publishes estimates for the effective life of assets. Using these figures protects you during an audit. You can find these estimates in Taxation Ruling TR 2021/3 or via the ATO depreciation and capital allowances tool.

For tradespeople, common effective life estimates include:

• Power tools and hand tools: Generally 2 to 5 years depending on quality and usage.
• Concrete mixers and compressors: Often 10 years.
• Ladders and trestles: Usually 5 to 10 years.

For vehicles, the effective life is typically longer:

• Cars and utilities: Generally 8 years.
• Trucks and light commercial vehicles: Generally 10 years.

Calculation Methods You may choose between the Prime Cost or Diminishing Value method for each asset.

• Diminishing Value: This calculates depreciation as a percentage of the remaining balance. It provides higher deductions in the early years of the asset's life. This is the standard choice for most tradespeople.
• Prime Cost: This calculates depreciation as a percentage of the original cost each year. This provides a steady, predictable deduction over the life of the asset.

Instant Asset Write-Off Check the current thresholds for the Instant Asset Write-Off scheme. If you purchase a vehicle or tools and the business portion is below the relevant threshold, you may claim a full deduction in the first year rather than depreciating over time. Always verify the current turnover threshold and asset cost limit in the relevant annual legislation.

Private Use If you use a vehicle or tool for private purposes, you must separate the business use percentage. You can only claim depreciation on the portion used for producing assessable income. Maintain a logbook for vehicles to substantiate this percentage.

Updates to the Schedule Review your schedule at the end of the financial year. If you sell an asset, you must calculate a balancing adjustment. This involves comparing the asset's termination value with its adjustable value. You may need to claim a further deduction or include a recoupment in your assessable income.