Company balance sheet does not balance? Check these first

In short: A company balance sheet balances when net assets (total assets minus total liabilities) equal shareholders' funds (share capital plus reserves). If they differ, measure the gap and trace it: check opening balances against last year's final accounts first, then imports, the profit and dividends in retained earnings, signs and missing liabilities. In the example below, net assets of £14,000 against imported equity of £15,000 leave a £1,000 difference to explain. The company's records must show its financial position with reasonable accuracy (Companies Act 2006, section 386).

Do not insert an unexplained number into retained earnings or a director's loan account to make a balance sheet agree. A difference is a clue that something needs investigating. Making the warning disappear can conceal the original error.

This is a practical troubleshooting sequence for a straightforward limited company. Stop and investigate further where the discrepancy depends on an accounting judgement rather than a missing or mistyped figure.

What has to balance on a company balance sheet?

Assets must equal liabilities plus equity; put another way, net assets must equal shareholders' funds, and any gap needs an explanation rather than a balancing figure (ACCA: the accounting equation). In the illustration below, £25,000 of assets less £11,000 of liabilities gives net assets of £14,000, which equity must match.

Illustration: a company has £20,000 cash and £5,000 owed by customers. It owes suppliers £7,000 and has a £4,000 loan liability. Assume there are no other assets or liabilities.

If share capital is £100 and retained earnings are £13,900, equity reconciles. If the imported equity is £15,000, the £1,000 discrepancy needs an explanation. It is not an invitation to reduce an arbitrary account by £1,000.

The balance sheet in the statutory accounts shows everything the company owns, owes and is owed on the last day of the financial year (GOV.UK: Prepare annual accounts for a private limited company), so every line needs support, not only the totals.

How do you find a balance sheet difference, step by step?

Measure the difference, then work outward: opening balances, imports, the equity reconciliation, signs and missing balances. Correct the source, record why, and confirm net assets equal equity. Work through the checks in order, because an opening position that already disagrees distorts everything after it, and write the difference down before changing anything.

Step 1: Measure the difference

Add up total assets and total liabilities, work out net assets, and compare the result with equity. In the illustration above, net assets are £14,000; if the imported equity is £15,000, there is a £1,000 discrepancy to explain. Write the amount down. It is a clue to investigate, not an invitation to reduce an arbitrary account by the same figure.

Step 2: Compare opening balances with last year's final accounts

Look first at the opening balances: compare them with the previous final accounts and ledger. Check for a prior-year adjustment posted in one system but not the other. If the opening position already disagrees with the previous final accounts, resolve that before looking at this year's transactions.

Step 3: Check what was imported

If you recently changed bookkeeping or accounts software, check what was imported. Opening balances, current-year movements and year-end balances are different things, and importing more than one as though they were all current transactions can double-count amounts. Record the first point at which the reports stop agreeing — often more useful than reviewing every transaction again.

Step 4: Reconcile retained earnings

In a simple case, retained earnings reconcile from opening retained earnings through the year's profit after tax and distributions, with other adjustments separately identified. Check that the current-year result has reached equity, that profit before tax hasn't been used instead of profit after tax, that dividends aren't deducted twice or missed, and that any prior-year adjustment or share issue is recorded consistently.

Step 5: Check signs and missing balances

Exports and input screens can use different debit, credit and negative-number conventions, so check the template instead of reversing signs by trial and error. Review supplier balances, loans and taxes against supporting records: a missing liability can make the company look stronger than it is. A director balance may be an asset rather than a liability, depending on who owes whom.

Step 6: Correct the source and record why

Fix the entry that caused the difference, not a balancing figure. Do not insert an unexplained number into retained earnings or a director's loan account to make the balance sheet agree. A temporary suspense entry may help while you investigate, but an unexplained suspense balance is not a finished answer. Save a correction note so the next reviewer understands why the figures changed.

Step 7: Confirm net assets equal equity

Re-run the totals: the balance sheet balances when net assets equal shareholders' funds with no unexplained or suspense amount left. That proves only that the totals reconcile under the presentation used, so finish with the normal review: supporting balances, comparative figures, presentation, accounting policies and tax computation. Stop and investigate further where the answer depends on an accounting judgement.

How should profit and dividends reconcile to equity?

For a simple case, retained earnings usually reconcile from opening retained earnings through the year's profit after tax and distributions, with other adjustments separately identified. In the illustration above, share capital of £100 plus retained earnings of £13,900 reconciles to net assets of £14,000.

Look for these questions in your reconciliation:

• Has the current-year result reached equity?
• Has profit before tax been confused with profit after tax?
• Are dividends deducted twice, or not reflected at all?
• Is a prior-year adjustment documented?
• Has a share issue been recorded consistently?

Do not assume every company has only share capital and retained earnings. Other reserves or transactions may need a more detailed reconciliation.

Could a sign error or missing balance cause the problem?

Yes: exports and input screens can use different debit, credit and negative-number conventions, so check the template instead of reversing signs by trial and error. A missing liability can also make the company look stronger than it is, so review supplier balances, loans and taxes against supporting records.

Conversely, a director balance may be an asset rather than a liability, depending on who owes whom.

Keep the actual ledger analysis behind those descriptions. HMRC expects companies to retain records of assets, debts, income and spending, not merely a set of totals. Read GOV.UK: Running a limited company: company and accounting records.

What does a balanced result prove?

A balanced balance sheet proves only that the totals reconcile under the presentation used. It does not prove that every asset exists, every liability is complete or every accounting policy is correct. So after resolving the difference, finish with the normal review of:

• Supporting balances, checked against the underlying records.
• Comparative figures for the previous year.
• Presentation of the balance sheet and accounts.
• Accounting policies used to prepare the figures.
• The tax computation behind the CT600.

Save the correction note so the next reviewer understands why the figures changed. When the accounts are settled, take the 30-second check to see whether Taxley fits your company.

Next step: once the figures reconcile, read our FRS 105 and FRS 102 Section 1A guide to consider the accounts framework. Check eligibility or presentation carefully where either is uncertain.

Frequently asked questions

Where should you look first for the difference?

At the opening balances: compare them with the previous final accounts and ledger, and check for a prior-year adjustment posted in one system but not the other. If you recently changed software, check what was imported next.

Can I use a suspense account temporarily?

Yes, as a working step only. A temporary suspense entry may help while you investigate a difference, but an unexplained suspense balance is not a finished answer. Resolve it before approving the accounts.

Is the difference always the current year's profit?

No. A current-year result that hasn't reached equity is one possible cause, not a diagnostic rule. The difference can equally come from opening balances that disagree with last year's accounts, a double-counted import, reversed signs, dividends deducted twice or a missing liability.

Can I put the difference into retained earnings?

No. Do not insert an unexplained number into retained earnings or a director's loan account to make the balance sheet agree: making the warning disappear can conceal the original error. Fix the entry that caused the difference and save a note explaining why the figures changed.

Can a director's loan account be an asset?

Yes. A director balance may be an asset rather than a liability, depending on who owes whom: money the director owes the company is an asset of the company. Check which way the balance runs before deciding where it belongs (who owes whom on a director's loan account).

General information, not personalised tax or accounting advice.