The Balance Sheet

Lesson Aims:Lesson Aims:

• To understand what the balance is used for and who uses it

• To understand what information is used to make a balance sheet – to understand the key terms on the balance sheet

• Balance sheets seem tricky but are quite easy to master

•The balance sheet is a picture of a company’s financial situation at a moment in time – a snap shot

• The idea behind it is simple – it records where the business got its money from and what it has done with it

• It shows what a business owns (assets), what it owes (liabilities) and how it paid for this…

Balance SheetsBalance Sheets

Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005 Fixed Assets

Property 80 Machinery 40 Vehicles 30

150 Current Assets Stock 5 Debtors 12 Cash 3 20 Current Liabilities Creditors 14 Unpaid Tax 1 15 Net Current Assets (Working Capital) 5 Net Assets 155 Financed by: Shareholder's Funds Share Capital 80 Retained Profit 50 Long Term Liabilities Bank Loan 20 Debentures 5 Capital Employed 155

These two figures must balance

These two figures must balance

What it’s doing with its money

What it’s doing with its money

Where its got it money from

Where its got it money from

Capital Capital EmployedEmployed

Net Net AssetAssetss

They must They must always balancealways balance

=

Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005

Fixed Assets Property 80 Machinery 40 Vehicles 30

150

The business has bought The business has bought some fixed assetssome fixed assets

The business has bought The business has bought some fixed assetssome fixed assets

Fixed Assets will last for Fixed Assets will last for MORE THAN MORE THAN ONE YEAR ONE YEAR – they will have – they will have

depreciateddepreciated but we don’t need to but we don’t need to worry about this here…..worry about this here…..

Fixed Assets will last for Fixed Assets will last for MORE THAN MORE THAN ONE YEAR ONE YEAR – they will have – they will have

depreciateddepreciated but we don’t need to but we don’t need to worry about this here…..worry about this here…..

Current Assets

Stock 5

Debtors 12

Cash 3

20

Current Assets last for a FEW Current Assets last for a FEW MONTHSMONTHS

Current Assets last for a FEW Current Assets last for a FEW MONTHSMONTHS

Liquidity of Liquidity of assets assets

increasesincreases

Liquidity of Liquidity of assets assets

increasesincreases

Raw materials Raw materials or finished or finished products it products it hasn’t soldhasn’t sold

Raw materials Raw materials or finished or finished products it products it hasn’t soldhasn’t sold

People who People who owe the owe the

business e.g. business e.g. trade credittrade credit

People who People who owe the owe the

business e.g. business e.g. trade credittrade credit

The most liquid The most liquid – money the – money the firm hasn’t firm hasn’t

spentspent

The most liquid The most liquid – money the – money the firm hasn’t firm hasn’t

spentspent

Current Liabilities

Creditors 14 Unpaid Tax 1 15

They have to They have to be be paid paid within one within one year year of the of the date of the date of the Balance Balance SheetSheet

They have to They have to be be paid paid within one within one year year of the of the date of the date of the Balance Balance SheetSheet

The opposite to The opposite to debtors – the debtors – the business business owesowes them. This is them. This is money owed to money owed to supplierssuppliers

The opposite to The opposite to debtors – the debtors – the business business owesowes them. This is them. This is money owed to money owed to supplierssuppliers

Fixed Assets Property 80 Machinery 40 Vehicles 30

150Current Assets

Stock 5 Debtors 12 Cash 3 20

Current Liabilities Creditors 14 Unpaid Tax 1 15 Net Current Assets (Working Cpaital) 5Net Assets 155

Net Current Net Current Assets Assets = = Current Assets Current Assets – Current – Current LiabilitiesLiabilities

Net Current Net Current Assets Assets = = Current Assets Current Assets – Current – Current LiabilitiesLiabilities

-+ It’s also called It’s also called

working capital working capital – does the – does the business have business have enough capital enough capital to pay off its to pay off its short-term short-term debts?debts?

It’s also called It’s also called working capital working capital – does the – does the business have business have enough capital enough capital to pay off its to pay off its short-term short-term debts?debts?

Net Current Assets + Fixed Assets = Net Current Assets + Fixed Assets = Net AssetsNet Assets. This is the . This is the net worth of the business – everything its spent its cash on!net worth of the business – everything its spent its cash on!Net Current Assets + Fixed Assets = Net Current Assets + Fixed Assets = Net AssetsNet Assets. This is the . This is the net worth of the business – everything its spent its cash on!net worth of the business – everything its spent its cash on!

Financed by: Shareholder's

Funds Share Capital 80 Retained Profit 50

Long Term Liabilities

Bank Loan 20

Debentures 5 Capital Employed 155

Capital Employed is what you get when Capital Employed is what you get when you add shareholders funds and long you add shareholders funds and long term liabilities. term liabilities. It must equal Net Assets!It must equal Net Assets!

Capital Employed is what you get when Capital Employed is what you get when you add shareholders funds and long you add shareholders funds and long term liabilities. term liabilities. It must equal Net Assets!It must equal Net Assets!

Money put into Money put into business from business from

share issueshare issue

Money put into Money put into business from business from

share issueshare issue

All the profit All the profit retained for retained for

future future investmentinvestment

All the profit All the profit retained for retained for

future future investmentinvestment

Money that is Money that is borrowed from borrowed from other people – other people – debts that take debts that take over a year to over a year to

paypay

Money that is Money that is borrowed from borrowed from other people – other people – debts that take debts that take over a year to over a year to

paypay

•All limited companies are All limited companies are required by law to produce required by law to produce a pnl account and a balance a pnl account and a balance sheetsheet

• The government uses them The government uses them to work out how much tax to work out how much tax should be collected. should be collected.

• Banks use them to decide Banks use them to decide whether to give a loan or whether to give a loan or notnot

• Investors use them to Investors use them to decide if they should decide if they should invest or notinvest or not

It seems tricky but practice makes It seems tricky but practice makes perfect…perfect…Top Tips:Top Tips:

• Make sure you know what all the Make sure you know what all the headingsheadings mean and what goes under itmean and what goes under it

• Remember there are 2 parts: what it has Remember there are 2 parts: what it has done with it’s money and where the money done with it’s money and where the money came fromcame from

• Net Assets = Capital employedNet Assets = Capital employed

• It shows the current position of a It shows the current position of a business on one particular date it is a business on one particular date it is a snap shot of what it owns and what it owes snap shot of what it owns and what it owes

1.1. On your blank balance sheet use one On your blank balance sheet use one colour to highlight the part that shows colour to highlight the part that shows what the business is doing with its what the business is doing with its capital and another to show where it capital and another to show where it got the capital from. Add a key.got the capital from. Add a key.

2.2. Draw arrows and explain the following Draw arrows and explain the following key terms: key terms: Fixed AssetsFixed Assets, , Current Assets Current Assets (what are stock, debtors, cash at (what are stock, debtors, cash at bank?), bank?), Current LiabilitiesCurrent Liabilities, , Net Net Current Assets Current Assets (Working Capital), (Working Capital), Net Net AssetsAssets, , Financed by: Owner’s Capital, Financed by: Owner’s Capital, Loan Loan and finally and finally Capital EmployedCapital Employed

3.3. What does the term ‘liquidity’ mean?What does the term ‘liquidity’ mean?

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