unit 3 - balance sheets
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7/21/2019 Unit 3 - Balance Sheets
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3.24
Understanding a
balance sheet
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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 moneyinvested or borrowed must be accounted for in
another section, called assets.
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3.24 Aims and Objectives Part 2
The key principle of a balance sheet
All assets All liabilitiesmust equal
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3.24 Aims and Objectives Part 2
hat are 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
#i$ed assets are items owned by the company
which!
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3.24 Aims and Objectives Part 2
hat are assets! 2
%&rrent assets include!
• "tems used and replaced regularly, eg raw
materials or stoc#
• $ustomers who owe money (called debtors
for goods they have bought
• Money in the current ban# account.
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3.24 Aims and Objectives Part 2
hat are liabilities! "
%&rrent liabilities are!
• Money the business owes to suppliers (called
creditors for goods purchased on credit
• %hort term loans
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3.24 Aims and Objectives Part 2
hat are liabilities! 2
'iabilities also includes capital and reserves.
• (hare capital is money which shareholders
have invested in the business
• )eserves & profit from previous years which
has been #ept to finance future developments
• *rofit and loss acco&nt & money #ept bac#
from the current year’s profits.
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3.24 Aims and Objectives Part 2
The str&ct&re of a profit and loss acco&nt " + Assets
#i$ed assets ,
'uildings ),)))
*+uipment ),)))
Total fixed assets 80,000
%&rrent assets
%toc# ),)))
-ebtors),)))
$ash at ban# ),)))
Total current assets 40,000
(Total assets = £120,000 but this figure doesn’t show)
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3.24 Aims and Objectives Part 2
The str&ct&re of a profit and loss acco&nt 2 + %&rrent liabilities
'-AB-'-T-(
,
%&rrent liabilities
$reditors /),)))
Net current assets/liabilities 30,000
(This is the current assets - £40,000 - minus the current liabilities)
Total assets less current liabilities 110,000
(This is the total assets - £120,000 - minus the current liabilities)
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3.24 Aims and Objectives Part 2
The str&ct&re of a profit and loss acco&nt 3 + %apital and reserves
%apital and reserves ,
%hare capital 0),)))
1eserves 2),)))
3rofit and loss account ),)))
(hareholders/ f&nds ""01000
(This is the total amount in caital and reser!es" #t must e$ual thesame amount as the total assets minus current liabilities)
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3.24 Aims and Objectives Part 2
*&tting it all together
A((T(
4i5ed assets (assets listed
Total fixed assets £80,000 A
$urrent assets (assets listed
Total current assets £40,000B
'-AB-'-T-(
$urrent liabilities %£10,000&
Net current assets/liabilities £30,000B –
Total assets less current liabilities £110,000A ! B –
$apital and reserves (all listed
"#are#olders$ funds £110,000%
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3.24 Aims and Objectives Part 2
)eading/ a balance sheet
• 'oth the balance sheet and the profit and loss
account show the ‘health’ of the business
• %hareholders, customers, suppliers, employees
and other groups of people will be interested in
both types of account.
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3.24 Aims and Objectives Part 2
ey aspects on a balance sheet
• #i$ed assets – is there enough money secured
in items which could be sold to raise capital6
• %ash in bank – is there enough to cover a
short/term crisis6
• et c&rrent assets5liabilities – if this figure is
negative, the business hasn’t enough money to
pay all the creditors in a reasonable time
• (hareholders/ f&nds – are these increasing6
%hareholders want their investment to grow.