The Balance Sheet

1. The Balance Sheet

2. 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

3. Balance Sheets • Balance sheets seem tricky but are quite easy to master • The balance sheet is a picture of a company’s 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…

4. What it’s doing with its money These two figures must balance Where its got it money from

5. Capital Employed Net Assets = They must always balance

6. The business has bought some fixed assets Fixed Assets will last for MORE THAN ONE YEAR – they will have depreciated but we don’t need to worry about this here…..

7. Current Assets last for a FEW MONTHS Raw materials or finished products it hasn’t sold Liquidity of assets increases People who owe the business e.g. trade credit The most liquid – money the firm hasn’t spent

8. Current Liabilities are Bills the firm has to Pay Soon 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 This is money that doesn’t really belong to the firm. You are going to have to stump up soon. So it is taken away from the current asset figure.

9. Net Current Assets = Current Assets – Current Liabilities + It’s 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!

10. 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 Capital Employed is what you get when you add shareholders funds and long term liabilities. It must equal Net Assets!

11. 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. • Banks use them to decide whether to give a loan or not • Investors use them to decide if they should invest or not

12. It seems tricky but practice makes perfect… • Top Tips: • Make sure you know what all the headings mean and what goes under it • Remember there are 2 parts: what it has done with it’s money and where the money came from • 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

13. Tasks 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. 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: Owner’s Capital, Loan and finally Capital Employed What does the term ‘liquidity’ mean?