ACCOUNTING& FINANCE

Balance Sheet

IGCSE Business Studies

Introduction and Key Definitions

It shows the financial position of a firm at a particular moment in time.

It shows the financial position of a firm at a particular moment in time.

what “assets” the business owns and where funds came fromwhat “assets” the business owns and where funds came from

Introduction and Key Definitions

• Assets – Things owned by the business

• Liabilities – money owed to others (but not owners)

• Shareholders/ owners’ Capital – money invested / reinvested by owner(s).

An example ( a limited Company’s balance sheet)

Note that net current assets are the same as “working capital and this is important as if it is low/negative a business may have cash flow problems

Introduction and Key Definitions

The value of net assets gives us the value of the company. It is also equal to the shareholders/owners capital as it represents the value of their holdings in the business

The value of net assets gives us the value of the company. It is also equal to the shareholders/owners capital as it represents the value of their holdings in the business

Another Example (a sole trader’s balance sheet

Drawings are the money taken from the business by the owner. It is the equivalent of dividends in a PLC

Drawings are the money taken from the business by the owner. It is the equivalent of dividends in a PLC

Help decision making:Help decision making:

• Potential buyers to determine purchase price.

• Potential lenders to assess the risk involved in lending money/likelihood loan can be repaid.

Role and Purpose

Help decision making:Help decision making:

• Shareholders to assess how well business is doing

• Management to identify if they are able to pay their debts off (“short term or current liabilities”)

Role and Purpose

Plus all companies are legally obliged to produce a Balance Sheet (+ P & L Account).

Plus all companies are legally obliged to produce a Balance Sheet (+ P & L Account).

Limitations

Can provide unrealistic picture of a business:Can provide unrealistic picture of a business:

• May not show the ‘true’ value of a business, eg skilled, highly motivated workforce, amount of customer loyalty.

• Need for independent auditors-people who come in and produce balance sheets .

Explanation of Key Balance Sheet Terms

Usually last more than a year, and don’t get used up in the production or provision of a product or service.

Usually last more than a year, and don’t get used up in the production or provision of a product or service.

AssetsFixed AssetsFixed Assets

Explanation of Key Balance Sheet Terms

AssetsCurrent AssetsCurrent Assets

Usually held for a relatively short period of time, ie under one year, easy to convert them into cash.

Explanation of Key Balance Sheet Terms

AssetsCurrent AssetsCurrent Assets

Stock raw materials, work in progress, finished goods. Debtors individuals / business who owe the business money. Cashin bank and at hand.

Explanation of Key Balance Sheet Terms

Current Liabilities

Monies owed by the business that must be paid within one year from the Balance Sheet date.

Explanation of Key Balance Sheet Terms

Current Liabilities

Overdraftsarrangements to withdraw more money from bank than deposited, to agreed limit. Interest charged.

Creditorsindividuals/businesses to whom the firm owes money.

Corporation tax tax based on company profits

Explanation of Key Balance Sheet Terms

Working Capital / Net Current Assets

The finance available for the day to day running of a business. Current assets less current liabilities.

In general, if current liabilities are greater than current assets, firm may struggle to meet debts as they fall due.

Explanation of Key Balance Sheet Terms

Long-term Liabilities

Monies owed by a business which do not have to be settled within one year.

Explanation of Key Balance Sheet Terms

Bank/building society loan eg mortgages over 12 months.

Long-term Liabilities

Explanation of Key Balance Sheet Terms

Net Assets

(Fixed + Current Assets) – (Current + Long-term Liabilities).

The net value of what the company owns / is worth.

Explanation of Key Balance Sheet Terms

Net Asset figure is balanced by the Shareholder’s funds.

Net Assets

Explanation of Key Balance Sheet Terms

Long-term funds raised by selling shares to family members and friends (private limited companies) or members of the general public (public limited companies).

Shareholder’s Funds / Capital & Reserves

Share CapitalShare Capital

Explanation of Key Balance Sheet Terms

Shareholder’s Funds / Capital & Reserves

ReservesReserves

Retained profit. All the retained profit ever made.

Explanation of Key Balance Sheet Terms

Capital Employed

Must equal Net Assets employed because any increase in assets must be funded by an increase in money to pay for it.