Balance Sheet
A balance sheet is a financial statement which gives some important information about a business to its
owners, managers, or other interested individuals. Balance sheet could be prepared at any time, but
they are always prepared at the end of a business’s financial period. Balance sheets give details of:
Assets: the resources owned by the business
Liabilities: the amounts owned by the business to other individuals’ businesses or organizations
Capital: the net value of the business which also represents the owner’s investment in the
business.
Typical assets for a small business include:
Cash at bank
Cash in hand
Equipment
Fixtures and fittings
Inventory
Land
Premise
Trade receivable
Vehicles
Typical liabilities for a small business include:
Bank loans
Bank overdraft
Trade payables
The accounting / balance sheet equation
This is the link between business’s assets, liabilities and capital and is referred to as the accounting
equation:
Assets = Capital + Liabilities
Capital = Assets - Liabilities
Liabilities = Assets - Capital
Whatever assets are owned by the business must have been purchased with finance supplied by the
owner (capital) and by external parties (liabilities). Example Mary opened a business called ‘The Village
Stores on 1 May 2012. On this date he invested $40,000 (his capital) and borrowed $10,000 from the
bank (a liability). So, at this date the business will have total assets of $50,000. Here is the accounting
equation using this information:
Assets = Capital + Liabilities
$50,000 = $40,000 + $10,000
Use the accounting equation to find the missing figure in the table
Businesses Assets Capital Liabilities
$ $ $
Business A 72,000 13,000
Business B 160,000 124,000
Business C 160,000 36,000
The classified balance sheet
Types of assets
Assets can be divided into two categories:
- Non-current assets: Those assets which a business intends to keep and make use of for a long
period (more than one year). Typical examples of non-current assets are premises, machinery,
equipment, furniture, fixtures, fittings, and vehicles
- Current assets: those assets which are frequently changing in value; they are assets which are
quickly turned into cash and are of benefit to the business for a short period of time (less than
one year) Typical examples of current assets are inventories, trade receivables, cash at bank and
cash in hand.
Types of liabilities
Liabilities can also be divided into two categories:
- Non-current liabilities are amounts owed which will be settled in the longer term (more than
one year). A typical example of a long-term liability is a bank loan (bank loans are normally
repayable over several years)
- Current liabilities are amounts owed which will be settled in the shorter term (less than one
year) Typical examples of current liabilities are trade payables and bank overdraft.
Preparing a classified balance sheet
The presentation of a simple balance sheet can be improved by setting out the details to show the
different categories of assets and liability.
Assets are normally shown in a particular order reflects how long each asset is expected to benefit the
business. It is usual to place assets in order of permanence
In the first part of the balance sheet non-current assets are recorded first, starting with premises
Current assets are recorded next in the order: inventories, trade receivables, cash at bank, and
cash in hand
In the second part of the balance sheet capital preceded non-current liabilities; current liabilities
are placed last
Preparing a classified balance sheet in order of permanence
Hightown Retail Store
Balance Sheet as at 30 September 2012
$ $
Non- Current Assets
Shop premises 50,000
Fixtures and fittings 9,000
Equipment 7,000
-------------
66,000
Current Assets
Inventories 6,200
Trade receivables 700
Cash at bank 3,400
Cash in hand 200
-------------
10,500
-------------
76,500
---------------
Capital 62,000
Non –current Liability
Bank loans 10,000
Current Liabilities
Trade Payables
4,500
---------------
76,500
----------------
Effect of transactions on the accounting equation and Balance Sheet
Show the effect of the following transactions below on the account equation
1. Indicate the effect by using the words INCREASE, DECREASE or NO EFFECT
Use this table format to prepare your answer. The first one is done for you
Transactions Assets Capital Liabilities
1. Owner buys goods on credit $1000 Increases Increases
2. Owner pays creditor by cheque
$44000
3. Owners puts more capital into the
business by cheque $98000
4. Owner takes money out of the
business bank account for personal
use $65000
5. Owner pays creditor from private
money $16900
6. Sold goods on credit to a customer
A. Barker $5000
7. Exchange a portion of land to settle
a liability for $200000
2. Complete the columns to show how much the assets, liabilities
And capital have been changed by the following transactions.
Effects upon
Assets Liabilities Capital
The first one is done for you
(a) We pay a creditor in cash $700 -$700 -$700
(b) Bought fixtures paying by cheque $2000
(c) Bought goods on credit $2750
(d) The proprietor introduces another $5000 cash into the firm
(e) J. Walker lends the firm cash $2000
(f) A debtor pays us by cheque $500
(g) We returned goods costing $600 to a supplier whose bill we
Had not paid
(h) Bought additional shop premises paying by cheque $50000
(i) Bought a motor van on credit $4000
(j) Repaid by cash a loan owed to P. Smith $1000
(k) Bought goods for $1500 paying by cheque
(l) The owner puts a further $8000 cash into the business.
(m)The owner takes out $1000 cash for his personal use.
(n)Paid a creditor $1900 by cheque
3. Balances on the account of Sam Peters are as follows
Cash $1000, Motor car $70000, Payables (creditors) $5000, Bank $40000, Receivables
(debtors) 15000, Inventory.
Calculate the new balances for the above accounts after the following transactions
(a) Sold goods to Dan Rogers, a customer, on credit for $10000
(b) Bought goods from C Moore on credit for $6000
(c) Bought goods from A. Davis $20000 by cheque
(d) The owner injected $6000 cash in the business.
(e) Bought a motor van for $20000. The auto dealer accepted $10000 by cheque, cash
$4000 and the balance remaining to be fully settled within 15 days.
(f) Exchanged goods worth $1500 to pay a debt.
(g) The owner took goods costing $500 for his personal use.
(h) Paid mortgage of $1500 by cheque.
4. Becky owns an interior design business. Her business’s balance sheet at 1st April, 2011
was as follows
Becky
Balance Sheet
As at 1st April, 2011
Assets Capital $32900
Furniture $11000
Vehicle $16000
Receivable $4400 Liability
Bank $2800 Payable $2200
Cash $900
-------------- --------------
$35100 $35100
---------------- ---------------
The following transactions occurred during the following few days.
2nd April Purchase additional furniture for $2400 and paid with cheque
3rd April Becky withdrew a cheque for $200 for her personal use
8th Received a cheque for $2900 from a customer who was indebted to the
Business.
12th Arranged a long-term loan with the bank for $7200. The funds were paid into
The business’s bank account.
18th Paid $400 by cash to the supplier for amount owing.
20th Transferred $100 cash to the business’s bank account.
Required
(a) Use the transactions above to adjust the amount on the balance sheet
(b) Prepare a new balance sheet.
5. C Harmon has the following items in his balance sheet as at 30th April 2007. Capital
$18900; Loan from Tasso $2000; Payables $1600; Fixtures $3500; Motor vehicle $4200;
Inventory $4950; Receivables $3280; Cash at bank $6450; Cash in hand $120.
During the first week of May 2007, Harmon
(a) Bought extra stock of goods on credit $770
(b) Received $280 in cash from a debtor.
(c) Bought extra fixtures by cheques $1000
Required
You are to draw up a balance sheet as at 7th May after the above transactions have been
completed.
