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Balance Sheet

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Balance Sheet

  1. 1. Balance Sheet SG Accounting & Finance Mr McGowan
  2. 2. Balance Sheet <ul><li>The profit and loss account shows the history of the business activity throughout the financial year. </li></ul><ul><li>The balance sheet shows a snapshot of a particular date in time. </li></ul><ul><li>CAPITAL = ASSETS - LIABILITIES </li></ul>
  3. 3. Balance Sheet Assets Liabilities & Capital Balance
  4. 4. Assets <ul><li>Assets – are what a business owns </li></ul><ul><li>Fixed assets – have a lifespan of more than one year, eg machinery, motor vehicles </li></ul><ul><li>Current Assets – are constantly changing eg stock, debtors, bank, cash </li></ul>
  5. 5. Liabilities <ul><li>Liabilities – what is owed by the business </li></ul><ul><li>Current Liabilities – eg trade creditors (suppliers of goods on credit), bank overdraft, short-term loans (less than 1 year) </li></ul><ul><li>Long-term liabilities – normally longer than 1 year – eg mortgage, bank loan </li></ul>
  6. 6. Capital <ul><li>Capital – provided by the owner of the business and treated as being owned to the owner of the business </li></ul><ul><li>Profits – may increase capital </li></ul><ul><li>Drawings – may decrease capital </li></ul><ul><li>Reserves – monies retained by business </li></ul>
  7. 7. Liquidity <ul><li>Liquidity shows us whether a business has enough assets to cover its debts. </li></ul><ul><li>Turning assets into cash to pay off debts is what normally happens. </li></ul><ul><li>Stock is the hardest to turn into cash. Why? </li></ul>
  8. 8. Working Capital <ul><li>Working Capital is: </li></ul><ul><li>Current Assets – Current Liabilities </li></ul><ul><li>If a business has too much working capital then they are not using their resources properly. </li></ul><ul><li>If too little, then they may not be able to pay off short term debts. </li></ul>
  9. 9. Assets <ul><li>Fixed assets £ </li></ul><ul><li>Premises 60,000 </li></ul><ul><li>Equipment 20,000 </li></ul><ul><li>Total fixed assets 80,000 </li></ul><ul><li>Current assets </li></ul><ul><li>Stock 20,000 </li></ul><ul><li>Debtors 10,000 </li></ul><ul><li>Cash at bank 10,000 </li></ul><ul><li>Total current assets 40,000 </li></ul><ul><li>(Total assets = £120,000 but this figure doesn’t show) </li></ul>
  10. 10. Current liabilities <ul><li>LIABILITIES </li></ul><ul><li>£ </li></ul><ul><li>Current liabilities </li></ul><ul><li>Creditors -10,000 </li></ul><ul><li>Net current assets/liabilities 40,000 </li></ul><ul><li>(This is the current assets - £40,000 - minus the current liabilities) </li></ul><ul><li>Total assets less current liabilities 140,000 </li></ul><ul><li>(This is the total assets - £120,000 - minus the current liabilities) </li></ul>
  11. 11. Capital and reserves <ul><li>Capital and reserves £ </li></ul><ul><li>Share capital 70,000 </li></ul><ul><li>Reserves 30,000 </li></ul><ul><li>Profit and loss account 10,000 </li></ul><ul><li>Shareholders’ funds 110,000 </li></ul><ul><li>(This is the total amount in capital and reserves. It must equal the same amount as the total assets minus current liabilities) </li></ul>
  12. 12. Interpretation of Balance Sheet <ul><li>Do we have enough working capital to avoid cash flow problems? </li></ul><ul><li>Are we making enough use of available trade credit? </li></ul><ul><li>Is our level of debtors comparable with that of our industry competitors? </li></ul>

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