Balance Sheet Basics

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An introductory presentation outlining the structure and purpose of a balance sheet

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Balance Sheet Basics

  1. 1. Balance Sheet Basics
  2. 2. Balance Sheet & Financial Accounts Income statement This measures the business' performance over a given period of time, usually one year. It compares the income of the business against the cost of goods or services and expenses incurred in earning that revenue Balance sheet This is a snapshot of the business' assets (what it owns or is owed) and its liabilities (what it owes) on a particular day - usually the last day of the financial year Cash flow statement This shows how the business has generated and disposed of cash and liquid funds during the period under review.
  3. 3. The Balance Sheet This is a snapshot of the business' assets (what it owns or is owed) and its liabilities (what it owes) on a particular day - usually the last day of a financial period
  4. 4. Why does the balance sheet “balance”? Because EVERY financial transaction results in an equal change in assets or liabilities The concept of “double-entry”
  5. 5. Examples of “double-entry” Transaction Change in Assets Change in Liabilities/Equity Stocks bought from supplier on credit worth £5,000 Stocks up £5,000 Trade creditors up £5,000 Machinery bought for £100,000 in cash Non-current assets up £100,000 Cash down £100,000 No change Cash sales of £10,000 Cash up £10,000 Profit up £10,000
  6. 6. Non-current assets
  7. 7. Property, plant & equipment <ul><li>Assets the business intends to keep </li></ul><ul><li>Reflects the cost of capital expenditure </li></ul><ul><li>E.g. machinery bought for £100,000 </li></ul><ul><ul><li>Is shown as a non-current asset in the balance sheet </li></ul></ul><ul><ul><li>Not treated as a cost in the income statement </li></ul></ul><ul><li>Depreciation </li></ul><ul><ul><li>Allowance for the wearing out of a non-current asset over time </li></ul></ul><ul><ul><li>Treated as the cost of fixed assets wearing out </li></ul></ul>
  8. 8. Depreciation - illustrated Bought Net book Value (£) 100,000 Depreciation (Year 1) 90,000 Depreciation Charge (£) 0 10,000 Depreciation (Year 2) 80,000 10,000 Depreciation (Year 3) 70,000 10,000 Depreciation (Year 4) 60,000 10,000
  9. 9. Goodwill and intangible assets Only the “intangible” assets that have actually been bought can be included in the balance sheet
  10. 10. Current assets
  11. 11. What are current assets? Assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months
  12. 12. Inventories (stocks) <ul><li>The least liquid kind of current asset </li></ul><ul><li>Valued at the cost they were bought (not their selling price) </li></ul><ul><li>Stock obsolescence – value should reflect what could be recovered </li></ul>
  13. 13. Trade receivables <ul><li>Normally known as trade debtors </li></ul><ul><li>Amounts owed by customers buying on credit </li></ul><ul><li>Late payment is a common and increasing problem </li></ul><ul><li>Provision should be made for debtors not expected to pay </li></ul>
  14. 14. Cash and cash equivalents <ul><li>The most liquid current asset! </li></ul><ul><li>Balance sheet shows cash held at period-end </li></ul><ul><li>Can be manipulated through window-dressing </li></ul>
  15. 15. Current liabilities
  16. 16. Trade and other payables <ul><li>Trade payables – amounts owed to suppliers </li></ul><ul><li>Important to take all the supplier credit available </li></ul><ul><li>Worth comparing level of trade payables with trade receivables </li></ul>
  17. 17. Short-term borrowings <ul><li>Includes balance on bank overdraft </li></ul><ul><li>Shows the proportion of loans and other borrowings that have to be repaid in next 12 months </li></ul><ul><li>Remaining amounts owed are shown in non-current liabilities </li></ul>
  18. 18. Current tax liabilities <ul><li>Shows amounts owed in tax to IR&CE </li></ul><ul><li>Corporation tax = estimate of tax owed on profit for the period </li></ul><ul><li>Income tax and VAT = balance owed at end of month or quarter </li></ul>
  19. 19. Provisions <ul><li>Where a business make allowance for future costs and liabilities </li></ul><ul><li>Based on the accounting concept of “prudence” </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Potential costs of legal or customer disputes </li></ul></ul><ul><ul><li>Costs of reorganisation to which business is committed </li></ul></ul>
  20. 20. Non-current liabilities
  21. 21. Non-current liabilities <ul><li>Amounts that are owed, but not due to be paid in the next year </li></ul><ul><li>Long-term borrowings (e.g. bank loans & mortgages) would be shown here </li></ul>
  22. 22. Equity
  23. 23. Equity <ul><li>Two main parts to the equity half of the balance sheet </li></ul><ul><li>Share capital </li></ul><ul><ul><li>Cash raised by the business from the sale of new shares (at amount originally sold) </li></ul></ul><ul><ul><li>Does not reflect any change in value of share price </li></ul></ul><ul><li>Retained earnings </li></ul><ul><ul><li>Net profits which have not been distributed to shareholders </li></ul></ul>
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