Download Current Liabilities

Understanding and
Managing Finance
Presentation 4
Brief Version
Learning Outcomes




Understand the role and limitations of the Balance Sheet as
a summary of the financial position of a business.
Be able to work with a Balance Sheet in different formats
Be able to work out the effect of business transactions on a
Balance Sheet.
Be able to discuss some of the Accounting Conventions
associated with Balance Sheets
Financial Terms


Income – An amount of money which comes in to, or
is earned by, the business during an accounting
period - sometimes called Revenue.
Expenditure – An amount of money which has been
spent by, or goes out from, the business during an
accounting period.
Assets
Major characteristics
Assets are items of value
owned by the business.
In accounting terms, the
term ‘assets’ has a very
narrow meaning, defined
by these four
characteristics:
Read p 29 of M & A for
further explanation.
A probable future benefit
exists
The business has an exclusive
right to control the benefit
The benefit must arise from
some past transaction or event
The asset must be capable of
measurement in monetary terms
Claims
Claims are obligations
on the business to give
cash or benefit to some
external party.
Two major types of claim
Capital
Liabilities
Claims
Claims are what a business ‘owes’.
There are two forms of claims:
1. Capital: This is the owner’s (shareholders’)
investment in the business.
2. Liabilities: These are claims on the business
made by external individuals and organisations,
and include:

Trade Creditors

Bank and other Loans

Unpaid Tax
Balance Sheets In Horizontal Format
This method is the easiest to understand, as the
‘balance’ figure can be seen at once.
Balance Sheet Layout
(Horizontal Format)
Fixed Assets
+ Current Assets
Total Assets
Capital & Reserves +
Long-term Liabilities+
Current Liabilities
BALANCE
Total Claims
The balance sheet equation for
Horizontal Format Balance Sheets
plus
equals
Assets
Left Hand Side
Capital
Liabilities
Right Hand Side
Sample Balance Sheet (Horizontal format)
Fixed Assets
Land
Buildings
Fix & Fit
Total
£ 120,000
£ 150,000
£ 75,000
£ 345,000
Current Assets
Stock
£ 55,000
Debtors
£ 75,000
Bank
£ 25,000
Total
£ 155,000
________
£ 500,000
Capital & Reserves
Share capital
Retained profit
Total
L/T Liabilities
Loan
Total
Current Liabilities
Creditors
Tax & VAT
Total
The two bottom lines
Balance
£ 100,000
£ 120,000
£ 220,000
£ 250,000
£ 250,000
£ 22,000
£ 8,000
£ 30,000
________
£ 500,000
Recording Transactions




Last week we saw how different transactions affected
the double entry pages on the spreadsheet
This week we examine the effects of transactions on the
Balance Sheet
As last week each transaction will have two effects:
» One which increases the wealth of the business
» One which decreases the wealth of the business
The net effect will be zero.
Transaction 1
Fixed Assets
Land
Buildings
Fix & Fit
Total
£ 120,000
£ 150,000
£ 75,000
£ 345,000
Current Assets
Stock
£ 58,000
Debtors
£ 75,000
Bank
£ 22,000
Total
£ 155,000
________
£ 500,000
Stock is bought for £3000 Cash
Capital & Reserves
Share capital
£ 100,000
Retained profit
£ 120,000
Total
£ 220,000
L/T Liabilities
Loan
Net Effect : £ 250,000
Total
£ 250,000
Stock Liabilities
Increases by £3000
Current
Creditors
£ 22,000
Cash Reduces by £3000
Tax & VAT
£ 8,000
No Change in Balances
Total
£ 30,000
________
£ 500,000
Transaction 2
A Tax Bill of £5,000 is paid
Fixed Assets
Land
Buildings
Fix & Fit
Total
Net
Effect
Capital
& :Reserves
£ 120,000
Share capital
Cash reduces
by £5000
£ 150,000
Retained profit
£ 75,000
Total by £5000
Tax Reduces
£ 345,000
L/T Liabilities
Both Balances
Loan change by
the same
Current Assets
Total amount
Stock
£ 58,000
Current Liabilities
Debtors
£ 75,000
Creditors
Bank
£ 17,000
Tax & VAT
Total
£ 150,000
Total
________
£ 495,000
£ 100,000
£ 120,000
£ 220,000
£ 250,000
£ 250,000
£ 22,000
£ 3,000
£ 25,000
________
£ 495,000
Transaction 3
Fixed Assets
Land
Buildings
Fix & Fit
Total
Stock worth £2000 sold for £5000
Net
Effect :
Capital & Reserves
£ 120,000
Share capital
Cash increases
by £5000
£ 150,000
Retained profit
Stock Reduces
£ 75,000
Total by £2000
£ 345,000
L/T Liabilities
Profit Increases By £3000
Loan
Current Assets
Total change by
Both Balances
Stock
£ 56,000 the same
Current
Liabilities
amount
Debtors
£ 75,000
Creditors
Bank
£ 22,000
Tax & VAT
Total
£ 153,000
Total
________
£ 498,000
£ 100,000
£ 123,000
£ 223,000
£ 250,000
£ 250,000
£ 22,000
£ 3,000
£ 25,000
________
£ 498,000
Vertical Format Balance Sheets


Although the Horizontal Format for Balance Sheets is
easy to understand, many companies prefer to use the
Vertical Format.
This Balance sheet is divided into two parts:
» The top part shows the Net Assets of the Company,
that is, what the company owns when all debts and
loans and outstanding tax bills etc. have been paid
off.
» The bottom part shows the Shareholders’ Claim; in
other words, all the money that is invested in the
company through share owning.
The Balance Sheet Equation for
Vertical Layout Balance sheets
Fixed assets
plus
Current assets
less Current
liabilities
minus
Long-term
liabilities
equals
Capital
SAMPLE BALANCE SHEET (VERTICAL FORMAT)
Fixed Assets
Land
Buildings
Fix & Fit
Total
Current Assets
Stock
£ 55,000
Debtors
£ 75,000
Bank
£ 25,000
Total
£ 155,000
Current Liabilities
Creditors
£ 22,000
Tax & VAT
£ 8,000
Total
£ (30,000)
Net Current Assets
Total Assets
Less Long term liabilities (Loan)
Capital & Reserves
Share capital
Retained profit
£ 120,000
£ 150,000
£ 75,000
£ 345,000
£ 125,000
£ 470,000
£(250,000)
£ 220,000
£ 100,000
£ 120,000
£ 220,000
Summary of Balance Sheet Formats
Horizontal Format
Fixed Assets
Capital & Reserves +
+ Current Assets
=
Long-term Liabilities +
Current Liabilities
Vertical Format
Fixed Assets
+ Current Assets
- Current Liabilities
- Long term Liabilities
=
Capital & Reserves
Seminar Four - Activities
(a) Multiple Choice Test 1
This concerns
» Principles of Accounting (week 1)
» Double Entry Bookkeeping (week 3)
(b) Video: The Balance Sheet
(c) You should also attempt
Exercises 2.4 (M & A page 55)
A detailed solution is at the back of the book.
Exercises 2.6 (M & A page 55)
Solutions will be available for this next week.