Unit 3 - Balance Sheets

7/21/2019 Unit 3 - Balance Sheets

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3.24

Understanding a

balance sheet



3.24 Aims and Objectives Part 2

Basic principles of a balance sheet

• Most businesses borrow money to help them

to operate.

• A balance sheet has a special section – called

liabilities. This shows how much money has

been borrowed or invested – and where it came

from.

•The term ‘balance’ means that all the moneyinvested or borrowed must be accounted for in

another section, called assets.




The key principle of a balance sheet

All assets All liabilitiesmust equal




hat are 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

#i$ed assets are items owned by the company

which!




hat are assets! 2

%&rrent assets include!

• "tems used and replaced regularly, eg raw

materials or stoc#

• $ustomers who owe money (called debtors

for goods they have bought

• Money in the current ban# account.




hat are liabilities! "

%&rrent liabilities are!

• Money the business owes to suppliers (called

creditors for goods purchased on credit

• %hort term loans




hat are liabilities! 2

'iabilities also includes capital and reserves.

• (hare capital is money which shareholders

have invested in the business

• )eserves & profit from previous years which

has been #ept to finance future developments

• *rofit and loss acco&nt & money #ept bac#

from the current year’s profits.




The str&ct&re of a profit and loss acco&nt " + Assets

#i$ed assets ,

'uildings ),)))

*+uipment ),)))

Total fixed assets 80,000

%&rrent assets

%toc# ),)))

-ebtors),)))

$ash at ban# ),)))

Total current assets 40,000

(Total assets = £120,000 but this figure doesn’t show)




The str&ct&re of a profit and loss acco&nt 2 + %&rrent liabilities

'-AB-'-T-(

,

%&rrent liabilities

$reditors /),)))

Net current assets/liabilities 30,000

(This is the current assets - £40,000 - minus the current liabilities)

Total assets less current liabilities 110,000

(This is the total assets - £120,000 - minus the current liabilities)




The str&ct&re of a profit and loss acco&nt 3 + %apital and reserves

%apital and reserves ,

%hare capital 0),)))

1eserves 2),)))

3rofit and loss account ),)))

(hareholders/ f&nds ""01000

(This is the total amount in caital and reser!es" #t must e$ual thesame amount as the total assets minus current liabilities)




*&tting it all together

A((T(

4i5ed assets (assets listed

Total fixed assets £80,000 A

$urrent assets (assets listed

Total current assets £40,000B

'-AB-'-T-(

$urrent liabilities %£10,000&

Net current assets/liabilities £30,000B –

Total assets less current liabilities £110,000A ! B –

$apital and reserves (all listed

"#are#olders$ funds £110,000%




)eading/ a balance sheet

• 'oth the balance sheet and the profit and loss

account show the ‘health’ of the business

• %hareholders, customers, suppliers, employees

and other groups of people will be interested in

both types of account.




ey aspects on a balance sheet

• #i$ed assets – is there enough money secured

in items which could be sold to raise capital6

• %ash in bank – is there enough to cover a

short/term crisis6

• et c&rrent assets5liabilities – if this figure is

negative, the business hasn’t enough money to

pay all the creditors in a reasonable time

• (hareholders/ f&nds – are these increasing6

%hareholders want their investment to grow.

Unit 3 - Balance Sheets

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