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Balance sheet - the essence

The balance sheet shows what is owned (the value of assets), whatis owed (its liabilities) and what is left (owners equity)

Basically it records the value of assets owned, what the businessowes to others and how it was financed

It provides a concise snapshot of a companys financial position

It measures the financial standing or the net worth of a company atthe end of a given point in time

The format of a companys balance sheet is defined by theCompanies Act 1985

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Compare with the P&L Account

P&L Account

Main elements:

income (revenue)

expenses (costs)

profit or loss

Period covered

usually a year

Main focus

profits

Balance sheet

Main elements assets

liabilities

capital

Period covered a point in time

Main focus

value of net assets

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Horizontal format

Assets

Fixed assets

+

Current assets

Liabilities

Shareholders funds

+

Long term liabilities

+Current liabilities

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Assets

Assets are what the firm owns and what it is owed to the firm. They

are the resources the company uses to conduct business

Alternatively, they can be seen as everything the firm owns that has

a monetary value. Something owned by the business that has a

measurable cost

Assets bring economic benefit though their sale (e.g. stocks) or use

(e.g. equipment)

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Types of assets

Assets can be subdivided into:

Fixed assets

provide a benefit for more than 12 months tangible fixed assets (e.g. equipment)

intangible fixed assets (e.g. goodwill)

financial assets (e.g. investments in other companies)

Current assets provide a benefit for less than 12 months

stocks

debtors or amounts receivable

cash

prepayments

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Liabilities

Liabilities refer to amounts the firm owes to others and which have

monetary value

It is the amounts that the business is obliged to pay to other people

and organisations

Liabilities can be:

short term (current liabilities)

long term

capital-liability owed by the business to the owner

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A word of caution

A balance sheet is a snapshot at a particular point of time

Balance sheet items can be window dressed

The balance sheet does not reveal the value of a business since it isunlikely to record the current value of intangible assets or the currentvalue of property

It does not record qualitative factors (e.g. the quality of the fixed

assets)

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What it does not show

A companys market worth

Intangible assets e.g. knowledge, skills of the workforce

Vital business factors such as market share

Trends that affect performance

The true value of some fixed assets

The position after the date on which the balance sheet isconstructed

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Lessons Learned

What is a balance sheet.

Explain some of the key terms of a balance sheet.

What are assets?

What are liabilities?

What does a balance sheet not show?