The Balance Sheet
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
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…
Fixed Assets
Property
Machinery
Vehicles
80
40
30
150
Current Assets
Stock
Debtors
Cash
5
12
3
20
What it’s
doing with
its money
Current Liabilities
Creditors
Unpaid Tax
14
1
15
Net Current Assets (Working Capital)
Net Assets
Financed by:
Shareholder's Funds
Share Capital
Retained Profit
Long Term Liabilities
Bank Loan
Debentures
Capital Employed
5
155
These two
figures must
balance
80
50
20
5
155
Where its got
it money
from
Capital
Employed
=
Net
Assets
They must always
balance
Balance Sheet - Mr Reading's Burger Bar Ltd - 31st
March 2005
The business has bought
some fixed assets
Fixed Assets
Property
Machinery
Vehicles
80
40
30
150
Fixed Assets will last for MORE THAN
ONE YEAR – they will have
depreciated but we don’t need to
worry about this here…..
Current Assets last for a FEW
MONTHS
Current Assets
Liquidity of
assets
increases
Stock
Debtors
Cash
5
12
3
20
The most liquid
– money the
firm hasn’t
spent
Raw materials
or finished
products it
hasn’t sold
People who
owe the
business e.g.
trade credit
Current Liabilities
Creditors
Unpaid Tax
14
1
15
The opposite to
debtors – the
business owes
them. This is
money owed to
suppliers
They have to
be paid
within one
year of the
date of the
Balance
Sheet
Fixed Assets
80 Net Current
40 Assets =
30 Current Assets
150
Property
Machinery
Vehicles
Current Assets
Stock
Debtors
Cash
Current Liabilities
Creditors
Unpaid Tax
5
12
3
20
-
14
1
15
Net Current Assets (Working Cpaital)
Net Assets
– Current
Liabilities
+
It’s also called
working capital
– does the
business have
enough capital
to pay off its
short-term
5 debts?
155
Net Current Assets + Fixed Assets = Net Assets. This is the
net worth of the business – everything its spent its cash on!
Financed by:
Shareholder's
Funds
Share Capital
Retained Profit
Long Term
Liabilities
Bank
Loan
Debentures
Capital Employed
Money put into
business from
share issue
80
50
20
5
155
Capital Employed is what you get when
you add shareholders funds and long
term liabilities. It must equal Net Assets!
All the profit
retained for
future
investment
Money that is
borrowed from
other people –
debts that take
over a year to
pay
•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
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
Tasks
1. 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.
2. 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
3. What does the term ‘liquidity’ mean?