Understanding a

balance sheet

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3 24

Basic principles of a balance sheet

Most businesses borrow money to help them
to operate.

A balance sheet has a special section called

liabilities. This shows how much money has
been borrowed or invested and where it came
from.

The term balance means that all the money

invested or borrowed must be accounted for in
another section, called assets.

3.24 Aims and Objectives Part 2

The key principle of a balance sheet

All assets

must equal

All liabilities

3.24 Aims and Objectives Part 2

What are assets? 1

Fixed assets are items owned by the company
which:
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)

3.24 Aims and Objectives Part 2

What are assets? 2

Current assets include:

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.

3.24 Aims and Objectives Part 2

What are liabilities? 1

Current liabilities are:

Money the business owes to suppliers (called

creditors) for goods purchased on credit

Short term loans

3.24 Aims and Objectives Part 2

What are liabilities? 2

Liabilities also includes capital and reserves.

Share capital is money which shareholders

have invested in the business

Reserves = profit from previous years which

has been kept to finance future developments

Profit and loss account = money kept back

from the current years profits.

3.24 Aims and Objectives Part 2

The structure of a profit and loss account 1 Assets

Fixed assets

Buildings

60,000

Equipment

20,000

Total fixed assets

80,000

Current assets
Stock

20,000

Debtors

10,000

Cash at bank

10,000

Total current assets

40,000

(Total assets = 120,000 but this figure doesnt show)

3.24 Aims and Objectives Part 2

The structure of a profit and loss account 2 Current liabilities

LIABILITIES

Current liabilities
Creditors

-10,000

Net current assets/liabilities

30,000

(This is the current assets - 40,000 - minus the current liabilities)

Total assets less current liabilities

110,000

(This is the total assets - 120,000 - minus the current liabilities)

3.24 Aims and Objectives Part 2

The structure of a profit and loss account 3 Capital and reserves

Capital and reserves

Share capital

70,000

Reserves

30,000

Profit and loss account

10,000

Shareholders funds

110,000

(This is the total amount in capital and reserves. It must equal

the same amount as the total assets minus current liabilities)

3.24 Aims and Objectives Part 2

Putting it all together

ASSETS
Fixed assets

(assets listed)

Total fixed assets

80,000
Current assets

Total current assets

(assets listed)

40,000

10,000

LIABILITIES
Current liabilities

Net current assets/liabilities

30,000

Total assets less current liabilities

110,000

Capital and reserves

(all listed)

Shareholders funds

110,000

BC
A+BC

D
3.24 Aims and Objectives Part 2

Reading a balance sheet

Both the balance sheet and the profit and loss
account show the health of the business

Shareholders, customers, suppliers, employees

and other groups of people will be interested in
both types of account.

3.24 Aims and Objectives Part 2

Key aspects on a balance sheet

Fixed assets is there enough money secured
in items which could be sold to raise capital?

Cash in bank is there enough to cover a

short-term crisis?

Net current assets/liabilities if this figure is

negative, the business hasnt enough money to
pay all the creditors in a reasonable time

Shareholders funds are these increasing?

Shareholders want their investment to grow.
3.24 Aims and Objectives Part 2