ACCOUNTING & FINANCE Balance Sheet

Introduction and Key Definitions It shows the financial position of a firm at a particular moment in time. what “ 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).

Introduction and Key Definitions The accounting equation: Assets (what the money was used for) = Capital + Liabilities (where the money came from) The accounting equation: Assets (what the money was used for) = Capital + Liabilities (where the money came from)

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: 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).

Limitations 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. Assets Fixed Assets

Explanation of Key Balance Sheet Terms Assets Current 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 Assets Current Assets Stock raw materials, work in progress, finished goods. Debtors individuals / business who owe the business money. Cash in 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 Overdrafts arrangements to withdraw more money from bank than deposited, to agreed limit. Interest charged. Creditors individuals/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 Capital

Explanation of Key Balance Sheet Terms Shareholder ’ s Funds / Capital & Reserves Reserves 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.