1. THE BALANCE SHEET
Also called ‘Statement of Financial Position
Before looking at the Balance Sheet for Businesses we will recap at similar ideas for individuals
Create definitions of the following terms:-
Assets
Liabilities
Learning Outcomes
Describe the parts of the Balance Sheet.
Explain two problems highlighted in Balance Sheet.

2. This is Dave He owns a house worth $1.2 million.
Class discussion: Is Dave a millionaire?
Dave has a mortgage of $500,000
Question: How much of the house does Dave actually own?

3. Group Discussion: What does the following picture show?

4. Equity = Assets minus liabilities.
Commonly defined as all that you own
less all that you owe.
Equity can also be called Capital or Net Assets.
Equity is a similar concept to Net Worth – but applied to businesses not people
Copy the Blue Notes

5. This is Julie

6. Julie Barker’s Assets and Liabilities as at 30 June 2015
Net Assets
(A-L)
Assets
Current
Non Current
Liabilities $
Household appliances
4,000
Loan from mum (due next week)
500
Jewellery
6,900
Mortgage (due 2025)
106,000
Farmers store card account
3,000
Furniture
18,000
Bank Account
1,100
Credit card debt (due end of month)
1,300
Food in cupboard
3,300
Hire purchase on car (due 2018)
19,000
House
165,000
Car
27,000
Copy the Diagram
Activity Classify the list as either Assets or Liabilities

7. Assets and Liabilities
What a business (or person) owns
These are called assets E.g. ?
Two types:-
Current – Will be owned for less than a year
Non Current – will be owned for more than a year. E.g. Fixed Assets
Most businesses (and people) owe money or services to other people or institutions such as banks
These are called liabilities E.g. ?
Two Types:-
Current – Must be paid in the next year
or Non Current – Will be paid in full in more than a year.
Copy the Blue Notes

8. Equity = Assets - Liabilities Non Current Liabilities
The accounting equation is now stated as:-
Equity = Assets - Liabilities
Current Liabilities
&
Non Current Liabilities
Current Assets
&
Non Current Assets
Copy the Blue Notes

9. Current Assets less Current Liabilities.
Working Capital
Current Assets less Current Liabilities.
The “cash” available for day-to-day operations. It's used to pay bills.
Activity: Imagine Julie was a business - Calculate her Working Capital.
Is this situation a problem?
CA – CL = WC
Cash Flow Problem - When a business/ person does not have enough current assets to meet their current liabilities.
Working Capital is low or even negative.
Activity: Solving Cash Flow Problems – Activity Sheet.

10. Balance Sheet as at 31 March 2… $ Current assets (list) xx
(Business Name)
Balance Sheet as at 31 March 2… $
Current assets
(list) xx
Non-current assets
Total assets
Less Liabilities
Current liabilities
Non-current liabilities
Total liabilities
Net assets
A-L
Equity
Balance Sheet: To measure assets, liabilities at a point in time

11. John Bite, owner of a music retail store called Dig Music, has recorded the items below for the year ending December 31, 2020.
Item
($ 000s)
Inventory 40
Vehicles 80
Shop Premises
150
Mortgage
130
Creditors 20
Debtors 15
Long-term loan 50
Cash at Bank 5
Activity: Produce the Balance Sheet for December 2020 and calculate the Owner’s Equity.
Analysis Questions:-
Calculate John’s working capital. Is it safe?
Calculate the percentage of the business that is owned by John

12. Balance Sheet as at 31 December 2020
Dig Music
Balance Sheet as at 31 December 2020
$ 000's
Current assets
Cash at Bank 5
Inventory 40
Accounts receivable (debtors) 15 60
Non-current assets
Vehicles 80
Shop Premises
150
230
Total assets
290
Less Liabilities
Current liabilities
Accounts payable (creditors) 20
Non-current liabilities
Long-term loan 50
Mortgage
130
180
Total liabilities
200
Net assets 90
Equity
ANSWER

13. High Gearing – A problem
Gearing measures the proportion of a firm's assets are funded by owner's funds versus liabilities.
If the proportion is high (Above 50%) – it is termed high gearing. This is considered risky.
A business with high gearing is more vulnerable to a decrease in sales because the company must continue to:-
Pay Interest on its debts and
Repay its debts even though limited revenue is coming in.
A greater proportion of equity provides a cushion to protect the business.
Solution to this problem
Owner invests more funds to repay liabilities – this will increase equity.
Stop taking profits out of the business – This will mean assets can be funded by business cash rather than liabilities .
Activity - Over two thirds of Dig records has been funded by liabilities – is this a problem?

14. Learning Review Activity – What have you learned?
What are the five main parts of a balance sheet?
Which two problems highlighted in Balance Sheet?
Give two solutions to each problem?