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Learning Objective A
Examine the different elements of
balance sheet
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1. What is Balance Sheet?
Snapshot of the financial position
At a particular moment in time.
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Balance Sheet Equation
Capital + Liabilities = Assets. (1)
Capital + long-term liabilities + current liabilities =
Fixed assets + Current assets .. (2)
Fixed assets + [current assetscurrent liabilities]
long-term liabilities = Capital .. (3)
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Balance Sheet as at 30th June 2008
Fixed assets (FA) XCurrent assets (CA) X
Less:current liabilities (X)
Net current assets XLess: Long-term liabilities (X)
Net assets X
Capital (at the beginning of theyear)
X
Profits/(losses) X/(X)
Capital (at the end of the year) X 6
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Progress Check 1
Long-term bank loans raised 200,000. The
effect of this transaction on the Balance
Sheet equation will be:
a. Increase in capital and asset
b. Decrease in asset and liability
c. Increase in asset and liabilityd. Decrease in liability, capital and asset
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2. What are the different elements of
balance sheet?
Capital + Liabilities = Assets
Three elements in it:
Assets
Liabilities and
Capital/equity/ownership interests.
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Assets
Assets are the valuable resources which provide future benefits
acquired at a measurable cost and
owned and controlled by the organisation.
Assets may be classified as:
fixed assets and
current assets.
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Fixed assets Fixed assets are:
Long-term in nature
Useful for more than one year.
Examples include, land, building, plant and equipment.
These are tangible fixed assets.
Another type of fixed assets: Intangibles.
have no physical substance.
For example, goodwill, trademark, copyright etc.
Accounting Treatment: B/S: at acquisition cost (including installation and other costs) less
accumulated depreciation.
P& L: annual depreciation is shown as an expense.
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Depreciation
All assets depreciate due to:
wear and tear,
obsolescence,
reduction in value etc.
and have a finite useful life.
Depreciation is a process of allocating the costof an asset over its useful life.
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Depreciation Accounting
Example, Building cost 100,000;
Useful life 50 years.
Annual depreciation
100,000/50=2,000.
Profit and Loss StatementDepreciation expense 2,000
Balance Sheet
Building 100,000Less: Accumulated Depreciation 2,000
Book value or written down value 98,000
=======
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Current Assets
Convertible to cash within one a year orso.
Examples: stock, debtors, cash etc.
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Liabilities
Obligations to the outsiders.
It may be classified as:
current liabilities and
long-term liabilities.
Current liabilities are payable within a year or so.
Examples: Trade creditors and bank overdraft.
Long-term liabilities are payable over a long period of time.
For example, 5 years loan taken from a bank.
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Provision
An amount provided for particular future
expenses or losses.
Provisions for depreciation (accumulated
depreciation)
Provisions for bad debts
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Capital
It refers to the resources provided by the
owners to the business.
Why do we show it on the capital and liability
side of the Balance Sheet?
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Progress Check 2
Which of the following is an asset item?
a. Goodwill
b. Stunning Chief Executive
c. Bank Overdraft
d. Outstanding wages.
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Learning Objective B
Preparation of Balance Sheet
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EXAMPLE 1: VERTICAL FORMAT
Prepare a balance sheet from the
following information of Skylight
Limited at 30th September, 2003:
Capital 1,200,000
Profit and Loss 285,000
Goodwill 150,000
Land and Buildings 500,000
Plant 375,000
Motor vehicles 50,000
Stock 225,000
Bank 510,000Debtors 415,000
Creditors 410,000
Loans 330,000
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Skylight Limited
Balance Sheet as at 30th September, 2003.
Fixed assets
Goodwill 150,000
Land and Buildings 500,000
Plant 375,000Motor vehicles 50,000
_____
1,075,000
Current assetsStock 225,000
Debtors 415,000
Bank 510,000
_____
1,150,000Less: Current liabilities
Creditors 410,000
_____ 740,000
Less: Long-term liabilitiesLoan (330,000)
_____
1,485,,000====
Ownership interestCapital 1,200,000
Profit and Loss 285,000
--------------
1,485,000
=========
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EXAMPLE 2: CHANGES IN BALANCE SHEETSarah started a new business on 1 June. During the firstmonth of her business the following transactions tookplace:
a Sarah opened a bank account in the name of herbusiness and transferred 50,000 of her ownmoney to it.
b She borrowed 35,000 from the Commercial LoanCompany and paid the money into the businessbank account.
c She paid 40,000 for a small business unit
(premises).d She paid 3,000 for a second-hand delivery van.e She bought goods for resale for 10,000, paying
immediately, and further goods for 20,000, oncredit.
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f She sold goods, which had cost 15,000, for25,000. 5,000 of this was cash sales and theremaining 20,000 was credit sales.
g She paid staff wages for June totalling 500.h She paid 100 for petrol for the van.i She received 4,000 from trade debtors.
j She paid 200 to the Commercial LoanCompany as interest on the loan for themonth.
Required:Open a balance sheet for Sarahs business and show each ofthese transactions on it as a series of pluses and minuses toreach the position of the business as at the end of June.Ignore depreciation of the fixed assets. (Atrill & McLaney)
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Journal Entry
a. Bank Dr. 50,000
Capital Cr. 50,000
b. Bank Dr. 35,000
Loan Cr. 35,000
c. Business Unit Dr. 40,000
Bank Cr. 40,000
d. Delivery Van Dr. 3,000
Bank Cr. 3,000
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Continuation of Journal Entries 2
e. (a) Inventory Dr. 10,000
Bank Cr. 10,000
(b) Inventory Dr. 20,000
Accounts Payable Cr. 20,000
f. (a) Bank Dr. 5,000
Accounts Receivable Dr. 20,000
Sales Cr. 25,000
(b) Cost of the Goods Sold Dr. 15,000
Inventory Cr. 15,000
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Continuation of Journal Entries 3
g. Wage Dr. 500Bank Cr. 500
h. Petrol Dr. 100
Bank Cr. 100
i. Bank Dr. 4,000
Accounts Receivable Cr. 4,000
j. Interest Dr. 200
Bank Cr. 200
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Bank Account
Debit Pound Credit Pound
Capital Account 50,000 Business unit
Account
40,000
Loan Account 35,000 Delivery Van
Account
3,000
Sales Account 5,000 Inventory Account 10,000
Accounts
Receivable Account
4,000 Wage Account 500
Petrol Account 100
Interest Account 200
Balance C/D 40,200
Balance B/D 94,000 Balance B/D 94,000
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Delivery Van Account
Debit Pound Credit Pound
Bank Account 3,000 Balance C/D 3,0003,000 3,000
Balance B/D 3,000
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Petrol Account
Debit Pound Credit Pound
Bank Account 100 Balance C/D 100
100 100Balance B/D 100
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Interest Account
Debit Pound Credit Pound
Bank Account 200 Balance C/D 200
200 200
Balance B/D 200
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Loan Account
Debit Pound Credit Pound
Bank Account 35,000 Balance C/D 35,000
35,000 35,000
Balance B/D 35,000
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Capital Account
Debit Pound Credit Pound
Balance C/D 50,000 Bank Account 50,000
50,000 50,000
Balance B/D 50,000
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Business Unit Account
Debit Pound Credit Pound
Bank Account 40,000 Balance C/D 40,000
40,000 40,000
Balance B/D 40,000
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Inventory Account
Debit Pound Credit Pound
Bank Account 10,000 Cost of the Goods
sold account
15,000
Accounts payable
Account
20,000 Balance C/D 15,000
30,000 30,000
Balance B/D 15,000
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Sales Account
Debit Pound Credit Pound
Balance C/D 25,000 Bank Account 5,000
Accounts
Receivable Account
20,000
25,000 25,000Balance B/D 25,000
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Accounts Receivable Account
Debit Pound Credit Pound
Sales Account 20,000 Bank Account 4,000
Balance C/D 16,000
20,000 20,000
Balance B/D 16,000
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Account Payable Account
Debit Pound Credit Pound
Balance C/D 20,000 Inventory Account 20,000
20,000 20,000
Balance B/D 20,000
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Cost of Goods sold account
Debit Pound Credit Pound
Inventory Account 15,000 Balance C/D 15,000
15,000 15,000
Balance B/D 15,000
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Trial Balance
Debit Pound Credit Pound
Bank Account 40,200 Capital Account 50,000Inventory Account 15,000 Accounts Payable
Account
20,000
Petrol Account 100 Loan Account 35,000
Delivery Van
Account
3,000 Sales Account 25,000
Interest Account 200
Accounts
Receivable Account
16,000
Business Unit
Account
40,000
Cost of The Goods
sold Account
15,000
Wage Account 500
1,30,000 1,30,000
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Profit & Loss Account
Sales 25,000
COGS -15,000
Gross profit 10,000
Operating Expenses:Petrol -100
Wages -500
Operating Profit 9,400
Interest -200
Net Profit 9,200
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Balance Sheet
Assets Pound Capital & Liabilities Pound
Non-Current Assets: Capital 50,000.00
Delivery Van 3,000.00 (+)Net Profit 9,200.00 59,200.00
Business Unit 40,000.00
Current Assets: Current Liabilities:Closing stock (inventory) 15,000.00 Accounts Payable 20,000.00
Accounts Receivable 16,000.00 Non-current Liabilities:
Bank 40,200.00 Loan 35,000.00
1,14,200.00 1,14,200.00
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Sarahs Balance Sheet a
Assets
Cash at bank 50,000
Capital and Liabilities
Owners capital 50,000
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Sarahs Balance Sheet b
Assets
Cash at bank [50,000+35,000] 85,000
Capital and Liabilities
Owners capital 50,000
Loan 35,000
85,000
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Balance sheet as at the end of June
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Balance sheet as at the end of JuneAssets Claims
Bank account
(+50,000a +35,000b 40,000c
3,000d
10,000e +5,000f
500g
100h +4,000i200j) 40,200
Capital
(+50,000a 15,000f +5,000f
+20,000f
500g
100h
200j) 59,200
Business unit
(+40,000c) 40,000
Long-term creditor Commercial
Loan Company
(+35,000b) 35,000-
Motor van
(+3,000d) 3,000
Trade creditors
(+20,000e) 20,000
Stock-in-trade
(+10,000e +20,000e
15,000f) 15,000Trade debtors
(+20,000f4,000i) 16,000
114,200 114,200
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Learning Objective C
Interpretation of Balance SheetInformation
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B/S Interpretations
B/S limitations:
The value of assets may not reflect current value.
Subjective valuation rules
May exclude important assets.
However, B/S provides useful insights to the financial health of abusiness:
Liquidity: ability to pay short term liabilities.
Asset Mix: appropriate mix of fixed and current assets.
Financial Structure: appropriate mix of owned and borrowed capitals.
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Current Ratio
Indicator of short-term liquidity
Current Asset/Current Liability
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Skylight Limited
Current Ratio (CA/CL)
1,150,000/410,000 = 2.8
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Home Task
Activity
Try to assess the financial health of Skylight Limited on the
basis of balance information provided.
Home Task
Review self-assessment question 2.1, P.47 of your text
book.
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