What is a Balance Sheet?

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1 What is a Balance Sheet? A Balance Sheet is a financial statement which shows the ASSETS, LIABILITIES and CAPITAL of a business on a particular date. Assets Are Are items owned by by the the business or or owed to to the the business Capital Is Is the the money invested by by the the owner. Liabilities Are Are amounts owed by by the the business Business Studies Online: Slide 1

2 The Key Principle of a Balance Sheet All Assets must equal All Liabilities Business Studies Online: Slide 2

3 Explaining Assets Fixed assets last a long time, eg buildings, vehicles, computers cost a lot of money could be sold to increase capital (ie money owned by the business) Current assets Items used and replaced regularly, eg raw materials or stock Customers who owe money (called debtors) for goods they have bought Money in the current bank account. Business Studies Online: Slide 3

4 Explaining Liabilities Current Liabilities amounts owed which are due to be repaid within a year. Money the business owes to suppliers (called creditors) for goods purchased on credit Short term loans Long Term Liabilities amounts owed which are due to be repaid in more than a years time. Mortgages normally payable over a 25 year period. Long term bank loans Business Studies Online: Slide 4

5 How Money Works In Business Money constantly goes round a business in a cycle. This can be shown as follows: And the cycle will keep going round Business Studies Online: Slide 5

6 The Speed of the Working Capital Cycle Ideally a business will want to get round the cycle as quickly as possible How quickly it can get round depends on two factors: Speed of The Working Capital Cycle Creditors Debtors People a business owes money to They speed up the cycle People who owe the business money They slow down the cycle Business Studies Online: Slide 6

7 Calculating the Working Capital The working capital of a firm is calculated as follows: Working Capital = Current Assets Current Liabilities This calculation is part of the BALANCE SHEET A business will want to manage its working capital so that: It has enough cash to continue producing BUT that it does not have too much cash lying around that could be being used to make more money Business Studies Online: Slide 7

8 Depreciation Fixed assets do not last forever they wear out or become old fashioned This means that they lose value e.g. if you buy a car today for 10,000, it will not be worth 10,000 this time next year! So this must be shown in balance sheet. This is called DEPRECIATION, and is defined as The fall in value of a fixed asset Business Studies Online: Slide 8

9 Calculating Depreciation There are 2 ways to calculate depreciation: The Straight line Method The Reducing Balance Method The Straight-Line Method This reduces an asset by the same amount each year To calculate the amount it should be reduced by each year we use the formula: Depreciati on = Original Cost Expected Value Expected Years of Ownership Business Studies Online: Slide 9

10 An Example of Straight-Line Depreciation A business buys machinery costing 20,000 It expects to keep it 5 years After 5 years it expects to sell it for 5,000 This means that the depreciation will be: 20,000 5,000 Depreciati on = = 5 Years 3, 000 per year Business Studies Online: Slide 10

11 The Reducing Balance Method This reduces the value of an asset by the same PERCENTAGE each year For example: If a business purchases a machine for 20,000 which it expects to keep 3 years, and it is depreciated by 40% each year, then the asset will be worth: Year 1: 20,000 x 40% = 8000 depreciation So machine is now worth 20,000 8,000 = 12,000 Year 2: 12,000 x 40% = 4,800 depreciation So machine is now worth 12,000 4,800 = 7,200 Year 3: 7,200 x 40% = 2,880 depreciation So after 3 years the machine is worth: 7,200 2,880 = 4,320 Business Studies Online: Slide 11

12 The Effect of Depreciation Depreciation affects the accounts of businesses in 2 ways: The actual depreciation is an expense, so goes in the TRADING, PROFIT & LOSS ACCOUNT The new value of the fixed asset is then shown in the BALANCE SHEET Business Studies Online: Slide 12

13 The Structure of a Balance Sheet (1) Business Name and Date Balance Sheet For A.B.Hive LTD as at 31 December 2004 Fixed assets Fixed Assets Building are listed and 170,000 then added up. Equipment 60, ,000 Current assets Stock 30,000 Debtors 10,000 Cash at bank 5,000 45,000 Current Assets are listed and totalled Business Studies Online: Slide 13

14 The Structure of a Balance Sheet (2) Current Liabilities listed and totalled Current liabilities Trade creditors 25,000 Calculated by current assets current liabilities Net Current Assets 20,000 OR Working Capital Less Long Term Liabilities Mortgage 45,000 Loan 5,000 50,000 Calculated by fixed assets + working capital long term liabilities Net Assets 200,000 Long Term liabilities are listed and totalled, then taken away Business Studies Online: Slide 14

15 The Structure of a Balance Sheet (3) This section shows FINANCED BY: where the money in the business has come from. Capital and reserves Share capital 75,000 Profit and loss account 125,000 Total Capital Employed 200,000 This means that 200,000 has been invested in the business Business Studies Online: Slide 15

16 Who Uses A Balance Sheet? Both the balance sheet and the profit and loss account show the health of the business All the stakeholders will be interested in the balance sheet, but especially: Shareholders Customers Suppliers Employees This is because when used with the Trading Profit and Loss account it shows how well the business is doing. Business Studies Online: Slide 16

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