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The Balance Sheet

Higher/Int 2

Business Management

2009-2010

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What The Balance Sheet Shows

• This is a statement which shows the assets and liabilities of an organisation at a particular point in time.

• Assets are what the organisation owns.

• Liabilities are what the organisation owes.

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Why? The Balance Sheet

• The basic idea of the Balance Sheet is pretty simple.

• It records where the business got its money from and what it has done with it.

• The two balance out giving the Balance Sheet its name.

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Assets, Liabilities and Capital

• The Balance Sheet shows the assets and liabilities of an organisation at a particular point in time, balanced against the money invested.

• Capital is the money invested in the organisation.

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The Accounting Equation

• The Balance Sheet forms the balancing accounting equation:

Assets - Liabilities = Capital

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When? Do We Balance?

• The Balance Sheet is drawn up at the end of the accounting period as part of the preparation of the final accounts.

• The Balance Sheet is out of date by the time it is published (this could be 3 months after the end of the financial year).

• Therefore the Balance Sheet forms part of the historical accounting records.

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Assets

The two different types of assets owned by organisations are:

– Fixed Assets

– Current Assets

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Fixed Assets

• Fixed assets are assets which the organisation expects to last for more than one year:

• e.g. Buildings, Machinery,Vehicles

• The Balance Sheet shows the value of fixed assets as the value at the end of the financial year. This is the value after depreciation has been accounted for.

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Fixed Assets

• Fixed assets are the productive assets of an organisation.

• They enable the organisation to operate on a day to day basis.

• The Balance Sheet, lists fixed assets expected to last the longest first.

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Current Assets

• Current assets are assets which the organisation expects to last for only a few months:

• e.g. Stock, Debtors, Cash in the Bank

• The Balance Sheet lists current assets in order of increasing liquidity.

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Current Assets (In Order)

• Stock: The least liquid, including raw materials and finished products.

• Debtors: The value of products sold that have not yet been paid for by customers.

• Cash: The most liquid current asset.

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Current Liabilities

• Current Liabilities are any payments the organisation will have to make over the next 12 months.

• This is money which doesn’t really belong to the organisation, they will need to pay it to someone else pretty soon.

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Current Liabilities

• Creditors: The opposite of debtors, this is money that the organisation owes to its suppliers.

• Corporation Tax: This is payable to the government, based on last year’s profits.

• Unpaid Dividends: Dividends which have not yet been paid to shareholders, but have been promised to them.

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Net Current Assets

• The figure of Net Current Assets is found from the total Current Assets, less the total Current Liabilities.

• This figure is also known as Working Capital.

• Working Capital is the finance available to operate the organisation on a day to day basis.

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Current Assets Current Liabilities

• When the total current liabilities are greater than the total current assets, this shows that the organisation is in potential financial difficulty.

• It may be unable to meet its most immediately payable debts.

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Current Assets Current Liabilities

• In extreme cases, the organisation may have to sell off some of its fixed assets to meet the current liabilities.

• Fixed assets are the productive assets to an organisation so this is a dangerous path to have to follow.

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Net Assets

• The figure of Net Assets is found from the total value of Fixed Assets, plus the total value of Net Current Assets.

• This figure is also known as Capital Employed.

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Financed By:

• This section of the balance sheet shows how Net Assets have been financed.

• This includes:– Issued Share Capital (Shares)– Reserves from Profit and Loss Account– Any Long Term Liabilities (e.g. Mortgages)

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Sole Traders and Partnerships

• The Balance Sheet of a sole trader or partnership has the same layout as that of a limited company.

• However, an additional term ‘Drawings’ may appear.

• Drawings are the value of resources that an owner takes for their private use. These can be taken in the form of cash, goods or services.

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Interpretation

• The Balance Sheet can help us to answer the following questions:– Do we have sufficient liquid assets to meet our short

term debts? (ie. Enough working capital to avoid cash flow problems?)

– Are we making enough use of free credit facilities available to us?

– Is our level of debt comparable to that of our industry competitors?

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Task

• Read pages 6-10 from your core notes.

• Using the knowledge gained from this presentation and the relevant pages in the core notes, answer Activity 4 on the Balance Sheet.