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The Balance Sheet

An introduction to the Balance Sheet of a business or club.

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The Balance Sheet

  1. 1. Understanding a Balance Sheet
  2. 2. Basic Principles of a Balance Sheet <ul><li>Most businesses borrow money to help them to operate. </li></ul><ul><li>A balance sheet has a special section – called liabilities . This shows how much money has been borrowed or invested – and where it came from. </li></ul><ul><li>The term ‘balance’ means that all the money invested or borrowed must be accounted for in another section, called assets . </li></ul>
  3. 3. What are Assets? <ul><li>last a long time e.g., buildings, vehicles, computers. </li></ul><ul><li>cost a lot of money. </li></ul><ul><li>could be sold to increase capital (i.e. money owned by the business). </li></ul>Fixed assets are items owned by the company which:
  4. 4. What are Assets? <ul><li>Current assets include: </li></ul><ul><li>Items used and replaced regularly e.g., raw materials or stock. </li></ul><ul><li>Customers who owe money (called debtors ) for goods they have bought. </li></ul><ul><li>Money in the current bank account. </li></ul>
  5. 5. What are Liabilities? <ul><li>Current liabilities are: </li></ul><ul><li>Money the business owes to suppliers (called creditors ) for goods purchased on credit. </li></ul><ul><li>Short term loans. </li></ul>
  6. 6. What are Liabilities? <ul><li>Liabilities also includes capital and reserves. </li></ul><ul><li>Share capital is money which shareholders have invested in the business. </li></ul><ul><li>Reserves = profit from previous years which has been kept to finance future developments. </li></ul><ul><li>Profit and loss account = money kept back from the current year’s profits. </li></ul>
  7. 7. The structure of a Balance Sheet – Assets <ul><li>Fixed assets € </li></ul><ul><li>Buildings 60,000 </li></ul><ul><li>Equipment 20,000 </li></ul><ul><li>Total fixed assets 80,000 </li></ul><ul><li>Current assets </li></ul><ul><li>Stock 20,000 </li></ul><ul><li>Debtors 10,000 </li></ul><ul><li>Cash at bank 10,000 </li></ul><ul><li>Total current assets 40,000 </li></ul><ul><li>(Total assets = €120,000 but this figure doesn’t show) </li></ul>
  8. 8. The structure of a Balance Sheet– Current liabilities <ul><li>LIABILITIES </li></ul><ul><li>€ </li></ul><ul><li>Current liabilities </li></ul><ul><li>Creditors -10,000 </li></ul><ul><li>Working Capital 30,000 </li></ul><ul><li>(This is the current assets - €40,000 - minus the current liabilities) </li></ul><ul><li>Total Net Assets 110,000 </li></ul><ul><li>(This is the total assets - €120,000 - minus the current liabilities) </li></ul>
  9. 9. The structure of a Balance Sheet– Capital and Reserves <ul><li>Financed By: € </li></ul><ul><li>Accumulated Fund 70,000 </li></ul><ul><li>Surplus of Income 40,000 </li></ul><ul><li>Capital Employed 110,000 </li></ul><ul><li>(This is the total amount in Capital and Reserves. It must equal the same amount as the total assets minus current liabilities). </li></ul>
  10. 10. Putting it all together <ul><li>ASSETS </li></ul><ul><li>Fixed assets (assets listed) </li></ul><ul><li>Total fixed assets €80,000 A </li></ul><ul><li>Current assets (assets listed) </li></ul><ul><li>Total current assets €40,000 B </li></ul><ul><li>LIABILITIES </li></ul><ul><li>Current liabilities –€10,000 C </li></ul><ul><li>Working Capital €30,000 B – C </li></ul><ul><li>Total Net Assets €110,000 A + B – C </li></ul><ul><li>Financed By: (all listed) </li></ul><ul><li>Capital Employed €110,000 D </li></ul>
  11. 11. ‘ Reading’ a Balance Sheet <ul><li>Both the balance sheet and the profit and loss account show the ‘health’ of the business </li></ul><ul><li>Shareholders, customers, suppliers, employees and other groups of people will be interested in both types of account. </li></ul>
  12. 12. Key aspects of a Balance Sheet <ul><li>Fixed assets – is there enough money secured in items which could be sold to raise capital? </li></ul><ul><li>Cash in bank – is there enough to cover a short-term crisis? </li></ul><ul><li>Working Capital – if this figure is negative, the business hasn’t enough money to pay all the creditors in a reasonable time. </li></ul><ul><li>Shareholders’ funds – are these increasing? Shareholders want their investment to grow. </li></ul>