1. Finance - Balance Sheets (Part 1)
GCSE Business
Finance - Balance Sheets (Part 1)

2. Learning Objective
To understand what a balance sheet is.

3. Qs What are liabilities
Balance Sheet
The balance sheet is a record of a business assets and liabilities.
Like a P/L account it is a record of what has happened.
Qs What are assets?
Qs What are liabilities
Assets
These are what the business owns
Liabilities
This is what the business owes.

4. The Balance Sheet There are 2 parts to a balance sheet:
The Top Half
This shows what the business has done with its money.
It is called NET ASSETS. (This is what the business is worth)
The Bottom Half
This shows where all the money that the business has used came from.
It usually comes from shareholders, retained profit and loans.
It is often called CAPITAL EMPLOYED.

5. The bottom part looks at …
Fixed Assets
Premises
 60,000
Equipment
 14,000
Current Assets
Stocks
2,000
Debtors
5,000
Cash at Bank
Current Liabilities
Overdraft
3,000
Creditors
Working Capital
Net Assets
Financed by:
Owners Capital
40,000
Long Term Liability (Loan)
Capital Employed
The top part looks at …
Net Assets
The bottom part looks at …
Capital Employed

6. What do these key terms mean?
Key Words
Fixed assets (tangible and intangible assets)
Current assets
Current liabilities
Long term liabilities
Net Assets
Capital Employed
What do these key terms mean?
We also need to know what the phrase working capital means.

7. Fixed Assets
Current Assets
Current Liabilities
Long Term Liabilities
Net Assets
Capital Employed

8. This is the long term and permanent capital of the business.
These are assets that are owned by a business which it uses over a long period of time (such as buildings and machinery). It can include assets that are tangible and intangible assets.
What's the difference?
This is money that the business owes and will have to pay in more than 12 months time. This can includes long-term loans and mortgages.
This is the long term and permanent capital of the business.
It is calculated using the formula:
Shareholders funds/Profit + Long Term Liabilities
In finance what does the word capital mean?
This is money that the business owes that it has to pay back within the next 12 months.
For most businesses the most important liability is the money it owes to its.
What does the word creditor mean?
This shows a business the value of all the assets it owns.
fixed capital + working capital
Can you find out what working capital means?
These are the assets that the business that can easily turn into cash (it can also include cash in the bank). Examples include stocks and any money owed to the business (debtors).

9. Other Key Features: Working Capital
Working capital pays the day to day running expenses.
It is what the business owns which is either cash or can be turned into cash.
It is calculated using the following sum:
Current assets
MINUS
Current Liabilities

10. Net Assets Employed = Capital Employed
On the balance sheet:
Net Assets Employed = Capital Employed
The top and the bottom must be equal … why?
Fixed Assets +
Working Capital
(CA – CL)
Shareholders
Funds +
Retained Profit
Long Term Loans

11. This the top part of the BS sheet
Balance Sheet For Morgan’s Ladders 31st March 2012
£000 £000
Fixed Assets
Premises
Machinery
Vehicles
Current Assets
Stock
Debtors
Cash
Current Liabilities
Creditors
Working Capital
Net Assets Employed
Add up Fixed Assets
150
Add up Current Assets
Working Capital = Current Assets – Current Liabilities 20
Fixed Assets + Working Capital 5
155

12. This is the 2nd part of the Balance sheet
Financed By:
£000 £000
Share Capital
Retained Profit
Long Term Liabilities
Bank Loan
130
Add all these figures
together
Capital Employed
155

13. Lets complete a balance sheet
Fixed Assets
Premises
 60,000
Equipment
 14,000
Current Assets
Stocks
2,000
Debtors
5,000
Cash at Bank
Current Liabilities
Overdraft
3,000
Creditors
Working Capital
Net Assets
Financed by:
Owners Capital
40,000
Long Term Liability (Loan)
Capital Employed
Lets complete a balance sheet

14. Long Term Liability (Loan)
Fixed Assets
Premises
 60,000
Equipment
 14,000
Current Assets
Stocks
2,000
Debtors
5,000
Cash at Bank
Current Liabilities
Overdraft
3,000
Creditors
Working Capital
Net Assets
Financed by:
Owners Capital
40,000
Long Term Liability (Loan)
Capital Employed
Example 2

15. Long Term Liability (Loan)
Fixed Assets
Premises
 60,000
Equipment
 14,000
74,000
Current Assets
Stocks
2,000
Debtors
5,000
Cash at Bank
 12,000
Current Liabilities
Overdraft
3,000
Creditors
6,000 
Working Capital
6,000
Net Assets
 80,000
Financed by:
Owners Capital
40,000
Long Term Liability (Loan)
Capital Employed
80,000

16. What is a ratio? A number representing a comparison between two things
Ratio’s
What is a ratio?
A number representing a comparison between two things

17. Current Ratio’s
Another way to find out whether there is enough working capital is using a CURRENT RATIO
This is calculated using the following sum:
Current Ratio = Current Assets
Current Liabilities

18. Working Capital Good Working Capital Survive Cope in a crisis
Bad Working Capital
Can’t pay day to day expenses
financial difficulties

19. What's the Difference
The higher the ratio of current assets to current liabilities the higher the amount of working capital there is.
The lower the ratio of current assets to current liabilities the lower the amount of working capital there is.

20. Qs What does it tell you about the businesses working capital?
Activity
Qs Calculate the working capital again using using the current ratio method.
Qs What does it tell you about the businesses working capital?

21. The Acid Test Ratio Stock is part of working capital.
However it might be difficult to sell stock quickly if it needed the cash.
So business use the acid ratio test.

22. Ratio
Acid Test ratio =
Current Assets - Stock
Current Liabilities

23. Qs Calculate the Ratio for Smith’s Business
What does it mean?
The higher the ratio the safer the business is.
Qs Calculate the Ratio for Smith’s Business