1 The Balance Sheet Higher Grade Business Management 2009

2 What The Balance Sheet Shows This is a statement which shows the assets and liabilities of an organisation at a particular point in time. Assets are what the organisation owns. Liabilities are what the organisation owes.

3 Why? The Balance Sheet The basic idea of the Balance Sheet is pretty simple. It records where the business got its money from and what it has done with it. The two balance out giving the Balance Sheet its name.

4 Assets, Liabilities and Capital The Balance Sheet shows the assets and liabilities of an organisation at a particular point in time, balanced against the money invested. Capital is the money invested in the organisation.

5 The Accounting Equation The Balance Sheet forms the balancing accounting equation: Assets - Liabilities = Capital

6 When? Do We Balance? The Balance Sheet is drawn up at the end of the accounting period as part of the preparation of the final accounts. The Balance Sheet is out of date by the time it is published (this could be 3 months after the end of the financial year). Therefore the Balance Sheet forms part of the historical accounting records.

7 Assets The two different types of assets owned by organisations are: –Fixed Assets –Current Assets

8 Fixed Assets Fixed assets are assets which the organisation expects to last for more than one year: e.g. Buildings, Machinery,Vehicles The Balance Sheet shows the value of fixed assets as the value at the end of the financial year. This is the value after depreciation has been accounted for.

9 Fixed Assets Fixed assets are the productive assets of an organisation. They enable the organisation to operate on a day to day basis. The Balance Sheet, lists fixed assets expected to last the longest first.

10 Current Assets Current assets are assets which the organisation expects to last for only a few months: e.g. Stock, Debtors, Cash in the Bank The Balance Sheet lists current assets in order of increasing liquidity.

11 Current Assets (In Order) Stock: The least liquid, including raw materials and finished products. Debtors: The value of products sold that have not yet been paid for by customers. Cash: The most liquid current asset.

12 Current Liabilities Current Liabilities are any payments the organisation will have to make over the next 12 months. This is money which doesn’t really belong to the organisation, they will need to pay it to someone else pretty soon.

13 Current Liabilities Creditors: The opposite of debtors, this is money that the organisation owes to its suppliers. Corporation Tax: This is payable to the government, based on last year’s profits. Unpaid Dividends: Dividends which have not yet been paid to shareholders, but have been promised to them.

14 Net Current Assets The figure of Net Current Assets is found from the total Current Assets, less the total Current Liabilities. This figure is also known as Working Capital. Working Capital is the finance available to operate the organisation on a day to day basis.

15 Current Assets Current Liabilities When the total current liabilities are greater than the total current assets, this shows that the organisation is in potential financial difficulty. It may be unable to meet its most immediately payable debts.

16 Current Assets Current Liabilities In extreme cases, the organisation may have to sell off some of its fixed assets to meet the current liabilities. Fixed assets are the productive assets to an organisation so this is a dangerous path to have to follow.

17 Net Assets The figure of Net Assets is found from the total value of Fixed Assets, plus the total value of Net Current Assets. This figure is also known as Capital Employed.

18 Financed By: This section of the balance sheet shows how Net Assets have been financed. This includes: –Issued Share Capital (Shares) –Reserves from Profit and Loss Account –Any Long Term Liabilities (e.g. Mortgages)

19 Sole Traders and Partnerships The Balance Sheet of a sole trader or partnership has the same layout as that of a limited company. However, an additional term ‘Drawings’ may appear. Drawings are the value of resources that an owner takes for their private use. These can be taken in the form of cash, goods or services.

20 Interpretation The Balance Sheet can help us to answer the following questions: –Do we have sufficient liquid assets to meet our short term debts? (ie. Enough working capital to avoid cash flow problems?) –Are we making enough use of free credit facilities available to us? –Is our level of debt comparable to that of our industry competitors?

21 Task Read pages 4-8 from your core notes. Using the knowledge gained from this presentation and the relevant pages in the core notes, answer Activity 3 on the Balance Sheet (page 28).