The Balance Sheet

Lesson Aims: To understand what the balance is used for and who uses it To understand what information is used to make a balance sheet – to understand the key terms on the balance sheet

Balance sheets seem tricky but are quite easy to master The balance sheet is a picture of a companys financial situation at a moment in time – a snap shot The idea behind it is simple – it records where the business got its money from and what it has done with it It shows what a business owns (assets), what it owes (liabilities) and how it paid for this… Balance Sheets

Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005 Fixed Assets Property 80 Machinery 40 Vehicles Current Assets Stock 5 Debtors 12 Cash 3 20 Current Liabilities Creditors 14 Unpaid Tax 1 15 Net Current Assets (Working Capital) 5 Net Assets 155 Financed by: Shareholder's Funds Share Capital 80 Retained Profit 50 Long Term Liabilities Bank Loan 20 Debentures 5 Capital Employed 155 These two figures must balance What its doing with its money Where its got it money from

Capital Employed Net Assets They must always balance =

Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005 Fixed Assets Property 80 Machinery 40 Vehicles The business has bought some fixed assets Fixed Assets will last for MORE THAN ONE YEAR – they will have depreciated but we dont need to worry about this here…..

Current Assets Stock 5 Debtors 12 Cash 3 20 Current Assets last for a FEW MONTHS Liquidity of assets increases Raw materials or finished products it hasnt sold People who owe the business e.g. trade credit The most liquid – money the firm hasnt spent

Current Liabilities Creditors 14 Unpaid Tax 1 15 They have to be paid within one year of the date of the Balance Sheet The opposite to debtors – the business owes them. This is money owed to suppliers

Fixed Assets Property 80 Machinery 40 Vehicles Current Assets Stock 5 Debtors 12 Cash 3 20 Current Liabilities Creditors 14 Unpaid Tax 1 15 Net Current Assets (Working Cpaital) 5 Net Assets 155 Net Current Assets = Current Assets – Current Liabilities - + Its also called working capital – does the business have enough capital to pay off its short-term debts? Net Current Assets + Fixed Assets = Net Assets. This is the net worth of the business – everything its spent its cash on!

Financed by: Shareholder's Funds Share Capital 80 Retained Profit 50 Long Term Liabilities Bank Loan 20 Debentures 5 Capital Employed 155 Capital Employed is what you get when you add shareholders funds and long term liabilities. It must equal Net Assets! Money put into business from share issue All the profit retained for future investment Money that is borrowed from other people – debts that take over a year to pay

All limited companies are required by law to produce a pnl account and a balance sheet All limited companies are required by law to produce a pnl account and a balance sheet The government uses them to work out how much tax should be collected. The government uses them to work out how much tax should be collected. Banks use them to decide whether to give a loan or not Banks use them to decide whether to give a loan or not Investors use them to decide if they should invest or not Investors use them to decide if they should invest or not

It seems tricky but practice makes perfect… Top Tips: Make sure you know what all the headings mean and what goes under it Make sure you know what all the headings mean and what goes under it Remember there are 2 parts: what it has done with its money and where the money came from Remember there are 2 parts: what it has done with its money and where the money came from Net Assets = Capital employed Net Assets = Capital employed It shows the current position of a business on one particular date it is a snap shot of what it owns and what it owes It shows the current position of a business on one particular date it is a snap shot of what it owns and what it owes

1.On your blank balance sheet use one colour to highlight the part that shows what the business is doing with its capital and another to show where it got the capital from. Add a key. 2.Draw arrows and explain the following key terms: Fixed Assets, Current Assets (what are stock, debtors, cash at bank?), Current Liabilities, Net Current Assets (Working Capital), Net Assets, Financed by: Owners Capital, Loan and finally Capital Employed 3.What does the term liquidity mean? Tasks