3

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24
Understanding a
balance sheet



3.24 Aims and Objectives Part 2
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 All liabilities must equal


3.24 Aims and Objectives Part 2
What are assets? 1
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)
Fixed assets are items owned by the company
which:


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 A
Current assets (assets listed)
Total current assets 40,000 B
LIABILITIES
Current liabilities 10,000 C
Net current assets/liabilities 30,000 B C
Total assets less current liabilities 110,000 A +B C
Capital and reserves (all listed)
Shareholders funds 110,000 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.
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