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A balance sheet is often described as a "snapshot" of the company's financial condition on a given date. Of the four basic Financial Statements , the balance sheet is the only statement which applies to a single point in time, instead of a period of time. A simple business operating entirely in cash could measure its profits by simply withdrawing the entire bank balance at the end of the period, plus any cash in hand. However real businesses are not paid immediately, they build up inventories of goods to sell and they acquire buildings and equipment. In other words: businesses have Asset s and so they could not, even if they wanted to, immediately turn these into cash at the end of each period. Real businesses also owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses have Liabilities . A modern balance sheet usually has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the 'net assets' or the 'net worth' of the company. The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. This balance is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as Double-entry Bookeeping . BALANCE SHEET STRUCTURE The following Balance Sheet structure is just an example. It does not show all possible kinds of assets, equity and liabilities, but it shows the most usual ones. It is a consolidated balance sheet, showing also consolidation-specific items. Monetary values are not shown, summary (total) rows are missing as well. Consolidated Balance Sheet of XYZ, Ltd. as at 31 December 2005 ASSETS Non-Current Assets Property, plant and equipment Goodwill Other intangible fixed assets Investments in associates Deferred Tax assets Current Assets Inventories Accounts Receivable Investments held for trading Cash and cash equivalents Other current assets EQUITY AND LIABILITIES Capital and reserves Share capital Capital Reserves Revaluation Reserve Translation Reserve Retained earnings Minority Interest Non-Current Liabilities Bank loans Issued debt securities Deferred Tax liability Provisions Current liabilities Accounts Payable Current income tax liabilities Short-term part of bank loans Short-term Provisions Other current liabilities EQUITY VALUATION The real value to a purchaser of the business or a shareholder may be different from the net assets shown by the balance sheet. This is because factors that affect the value of a business may not be recorded yet. For example, a purchaser will be interested in the future earnings of the business, whether assets such as property have been revalued recently, and whether there are potential liabilities in the future such as lawsuits. The value of the assets in the balance has also been based on the assumption that the business is a going concern, otherwise the break-up value of the assets may be far less than the value in the balance sheet. CONSTRUCTING A BALANCE SHEET Case Study ''1.1'' A new business starts up as a limited company called Sunrise Ltd by raising GBP10K from the owners i.e. share holders. The money is put in to a new bank account. What would the assets and liabilities be? Assets: Bank Balance of 10K Liabilities: Share capital of 10K needs to be paid back at some point. ''1.2'' They then use GBP6K of it’s bank account to buy a delivery van. List assets and liabilities after this transaction! Assets: Bank Account with 4K, VAN at 6K Liabilities: 10K Share Capital ''1.3'' Finally, Sunrise Ltd buys some stock at 3K on credit, agreeing to pay the following month. List assets and liabilities after this transaction! Assets: Bank Account with 4K, VAN at 6K, Stock worth 3K Liabilities: 10K Share Capital, Credit totaling 3K Total assets must always equal total liabilities. It is inevitable as the liabilities are providing the funds that we are spending on these assets. Shortly afterwards, the assets and liabilities change to the following: Assets: delivery van 6K, stock 3K, bank 500GBP, machinery 2200GBP, debtors 700GBP Liabilities: share capital 10K, creditors 400GBP, loan repayable in 5 years 2K ''1.4'' List and total the fixed and current assets Fixed Assets Delivery Van 6000 Machinery 2200 Total 8200 Current Assets Stock 3000 Bank 500 Debtors 700 Total 4200 Working Capital is the ‘Net Current Assets’. Net Current Assets is the current liabilities minus the current assets. ''1.5'' Now extend the balance sheet to include all liabilities, total your figures, and double underline your totals. Then list the share capital below the rest of the balance sheet. Fixed Assets Delivery Van 6000 Machinery 2200 8200 Current Assets Stock 3000 Bank 500 Debtors 700 4200 Current Liabilities Creditors 400 Working Capital 3800 12000 Long-term Liabilities Loan 2000 10000 Share Capital 10000 • Must be headed with the name of the reporting entity (e.g. Sunrise Ltd) and the date. • The terms ‘Current Liability’ and ‘Long-term Liability’ are the traditional names possibly used by sole traders or partnerships. Limited companies may use the phrases ‘Liabilities: amounts falling due within 1 year’ and ‘Liabilities: amounts falling due after 1 year’. • The Net Total is usually emboldened or double underlined to indicate it is a final total. It marks the end of the first side of the balance sheet and is called the ‘Net Worth’. o The Net Worth is in principle what the company is worth, it shows that if all assets were sold and all liabilities paid off then that is what would effectively left over. |
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