What is a Balance Sheet?

(1)

What is a Balance Sheet?

A Balance Sheet is a financial statement which shows the ASSETS, LIABILITIES and CAPITAL of a

business on a particular date.

Assets

Are items owned by the business

or owed to the business

Assets

Are items owned by the business

or owed to the business

Liabilities Are amounts

owed by the business Liabilities Are amounts

owed by the business

Capital Is the money invested by the

owner.

Capital Is the money invested by the

owner.

(2)

The Key Principle of a Balance Sheet

must equal

All Assets All Liabilities

(3)

Explaining Assets

last a long time, eg buildings, vehicles, computers

cost a lot of money could be sold to increase capital (ie money owned by the business)

Fixed assets Current assets

• Items used and

replaced regularly, eg raw materials or stock

• Customers who owe

money (called debtors) for goods they have

bought

• Money in the current bank account.

(4)

Explaining Liabilities

amounts owed which are due to be repaid within a year.

Money the business

owes to suppliers (called creditors) for goods

purchased on credit Short term loans

amounts owed which are due to be repaid in more than a years time.

Mortgages normally

payable over a 25 year period.

Long term bank loans Current Liabilities Long Term Liabilities

(5)

How Money Works In Business

Money constantly goes round a business in a cycle.

This can be shown as follows:

And the cycle will keep going round

(6)

The Speed of the Working Capital Cycle

Ideally a business will want to get round the cycle as quickly as possible

How quickly it can get round depends on two factors:

Speed of The

Working Capital Cycle

Creditors

• People a business owes money to

• They speed up the cycle

Debtors

• People who owe the business money

• They slow down the cycle

(7)

The working capital of a firm is calculated as follows:

Working Capital = Current Assets – Current Liabilities

This calculation is part of the BALANCE SHEET

A business will want to manage its working capital so that:

It has enough cash to continue producing

BUT… that it does not have too much cash lying around that could be being used to make more money

Calculating the Working Capital

(8)

Depreciation

Fixed assets do not last forever they wear out or become oldfashioned

This means that they lose value

e.g. if you buy a car today for £10,000,

it will not be worth £10,000 this time next year!

So this must be shown in balance sheet.

This is called DEPRECIATION, and is defined as

“The fall in value of a fixed asset”

(9)

Calculating Depreciation

There are 2 ways to calculate depreciation:

The Straightline Method

The Reducing Balance Method

The Straight

The Straight - - Line Method Line Method

This reduces an asset by the same amount each year To calculate the amount it should be reduced by each year we use the formula:

Ownership

of

Years

Expected

Value

Expected

Cost

Original

on

Depreciati =

(10)

An Example of Straight

An Example of Straight - - Line Depreciation Line Depreciation

A business buys machinery costing £20,000 It expects to keep it 5 years

After 5 years it expects to sell it for £5,000 This means that the depreciation will be:

year

per

000 ,

3 Years £

5 £5,000

£20,000

on

Depreciati = =

(11)

The Reducing Balance Method

This reduces the value of an asset by the same PERCENTAGE each year

For example:

If a business purchases a machine for £20,000 which it

expects to keep 3 years, and it is depreciated by 40% each year, then the asset will be worth:

Year 1: £20,000 x 40% = £8000 depreciation

So machine is now worth £20,000 £8,000 = £12,000 Year 2: £12,000 x 40% = £4,800 depreciation

So machine is now worth £12,000 £4,800 = £7,200 Year 3: £7,200 x 40% = £2,880 depreciation

So after 3 years the machine is worth:

£7,200 £2,880 = £4,320

(12)

The Effect of Depreciation

Depreciation affects the accounts of businesses in 2 ways:

The actual depreciation is an expense, so goes in the TRADING, PROFIT & LOSS ACCOUNT

The new value of the fixed asset is then shown in the BALANCE SHEET

(13)

The Structure of a Balance Sheet (1)

Balance Sheet

For A.B.Hive LTD as at 31 December 2004

Fixed assets £ £

Building 170,000

Equipment 60,000

230,000 Current assets

Stock 30,000

Debtors 10,000

Cash at bank 5,000

45,000

Business Name and

Date

Fixed Assets are listed and then added up.

Current Assets are listed and

totalled

(14)

The Structure of a Balance Sheet (2)

£ £

Current liabilities

Trade creditors 25,000 Net Current Assets

OR Working Capital

Less Long Term Liabilities

Mortgage 45,000

Loan 5,000

Current Liabilities

listed and totalled Calculated by

current assets – current liabilities

Long Term liabilities are listed

and totalled, then taken

away

20,000

50,000

(15)

The Structure of a Balance Sheet (3)

FINANCED BY: £

Capital and reserves

Share capital 75,000

Profit and loss account 125,000 Total Capital Employed 200,000

This section shows where the money in the

business has come from.

This means that

£200,000 has been invested in the business

(16)

Who Uses A Balance Sheet?

Both the balance sheet and the profit and loss account show the ‘health’ of the business

All the stakeholders will be interested in the balance sheet, but especially:

Shareholders Customers Suppliers Employees

This is because when used with the Trading Profit

What is a Balance Sheet?