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Final IBA Lecture 5

Final IBA Lecture 5

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After this lecture you should be able to

:

A. Examine the different elements of balance sheet B. Prepare balance sheet C. Interpret the information contained within a balance sheet.

Reading
Atrill & Mclaney (2008) Financial Accounting for Decision Makers, Chapter 2.

2

Learning Objective A
Examine the different elements of balance sheet

3

1. What is Balance Sheet?
• • Snapshot of the financial position At a particular moment in time.

4

Balance Sheet Equation
Capital + Liabilities = Assets…. (1)
Capital + long-term liabilities + current liabilities = Fixed assets + Current assets …….. (2) Fixed assets + [current assets –current liabilities] – long-term liabilities = Capital …….. (3)

5

Balance Sheet as at 30th June 2008 Fixed assets (FA) Current assets (CA) Less: current liabilities Net current assets Less: Long-term liabilities X X (X) X (X) Net assets Capital (at the beginning of the year) Profits/(losses) Capital (at the end of the year) X X X/(X) X 6 .

b. The effect of this transaction on the Balance Sheet equation will be: a.000. c.Progress Check 1 • Long-term bank loans raised £200. capital and asset 7 . d. Increase in capital and asset Decrease in asset and liability Increase in asset and liability Decrease in liability.

8 . What are the different elements of balance sheet? Capital + Liabilities = Assets Three elements in it: – Assets – Liabilities and – Capital/equity/ownership interests.2.

• Assets may be classified as: – fixed assets and – current assets.Assets • Assets are the – valuable resources which provide future benefits – acquired at a measurable cost and – owned and controlled by the organisation. 9 .

– Examples include. building. • Accounting Treatment: – B/S: at acquisition cost (including installation and other costs) less accumulated depreciation. – P& L: annual depreciation is shown as an expense. copyright etc. land. • Another type of fixed assets: Intangibles. goodwill. – For example. plant and equipment.Fixed assets • Fixed assets are: – Long-term in nature – Useful for more than one year. – These are tangible fixed assets. – have no physical substance. trademark. 10 .

– reduction in value etc. • and have a finite useful life. 11 . – obsolescence.Depreciation • All assets depreciate due to: – wear and tear. • Depreciation is a process of allocating the cost of an asset over its useful life.

Useful life 50 years. Profit and Loss Statement Depreciation expense £2.000 2.000/50=£2. Building cost £100.000.000 Balance Sheet Building Less: Accumulated Depreciation Book value or written down value £100.000 ======= 12 . Annual depreciation 100.Depreciation Accounting • Example.000.000 98.

cash etc. 13 . • Examples: stock.Current Assets • Convertible to cash within one a year or so. debtors.

• Long-term liabilities are payable over a long period of time.Liabilities • Obligations to the outsiders. • Current liabilities are payable within a year or so. 14 . • It may be classified as: – current liabilities and – long-term liabilities. – For example. – Examples: Trade creditors and bank overdraft. 5 years’ loan taken from a bank.

– Provisions for depreciation (accumulated depreciation) – Provisions for bad debts 15 .Provision • An amount provided for particular future expenses or losses.

• Why do we show it on the capital and liability side of the Balance Sheet? 16 .Capital • It refers to the resources provided by the owners to the business.

Outstanding wages. Stunning Chief Executive c.Progress Check 2 • Which of the following is an asset item? a. Bank Overdraft d. Goodwill b. 17 .

Learning Objective B Preparation of Balance Sheet 18 .

000 50.EXAMPLE 1: VERTICAL FORMAT Prepare a balance sheet from the following information of Skylight Limited at 30th September.000 415.000 225. 2003: Capital Profit and Loss Goodwill Land and Buildings Plant Motor vehicles Stock Bank Debtors Creditors Loans 1.000 500.000 330.000 375.000 410.000 150.000 19 .200.000 510.000 285.

000 500.000 415.000 ========= 20 Ownership interest Capital Profit and Loss .000 Current assets Stock Debtors Bank 225.000 _____ 1.000 50..485.000 Less: Long-term liabilities Loan (330. 2003.000 510.000 375.485.000 _____ 1.000 _____ Less: Current liabilities Creditors 740.150.200.Skylight Limited Balance Sheet as at 30th September.000 ==== 1. £ Fixed assets Goodwill Land and Buildings Plant Motor vehicles £ 150.075.000 -------------1.000 285.000) _____ 1.000 410.

During the first month of her business the following transactions took place: a Sarah opened a bank account in the name of her business and transferred £50.000. d She paid £3.000 from the Commercial Loan Company and paid the money into the business bank account.000.000 for a small business unit (premises). 21 . paying immediately.000 for a second-hand delivery van.EXAMPLE 2: CHANGES IN BALANCE SHEET Sarah started a new business on 1 June. and further goods for £20. b She borrowed £35. c She paid £40. on credit. e She bought goods for resale for £10.000 of her own money to it.

g She paid staff wages for June totalling £500. i She received £4.000 was credit sales. (Atrill & McLaney) . which had cost £15.000 from trade debtors.000. for £25.000. Ignore depreciation of the fixed assets.000 of this was cash sales and the remaining £20. j She paid £200 to the Commercial Loan Company as interest on the loan for the month. Required: Open a balance sheet for Sarah’s business and show each of these transactions on it as a series of pluses and minuses to reach the position of the business as at the end of June. £5.f She sold goods. h She paid £100 for petrol for the van.

Dr.000 40. Cr.000 b.000 3.000 40. Cr.Journal Entry a.000 35. c.000 3. Cr. Dr.000 50. Bank Capital Bank Loan Business Unit Bank Delivery Van Bank Dr. Cr. d. Dr.000 35. 50. .

Dr. (a) Bank Accounts Receivable Sales (b) Cost of the Goods Sold Inventory Dr.000 5. Dr.000 20. (a) Inventory Bank (b) Inventory Accounts Payable f.000 .000 25. Cr.000 20. Cr. Cr.000 20.Continuation of Journal Entries 2 e.000 10.000 15. 10. Cr. Dr. Dr.000 15.

Dr. Dr.Continuation of Journal Entries 3 g. i. Cr. Cr. Cr.000 200 200 h. Wage Bank Petrol Bank Bank Accounts Receivable Interest Bank Dr. Cr.000 4. 500 500 100 100 4. Dr. j. .

000 5.000 Credit Business unit Account Delivery Van Account Inventory Account Wage Account Petrol Account Interest Account Balance C/D Balance B/D 94.000 500 100 200 40.000 .000 10.200 94.000 35.000 4.000 3.Bank Account Debit Capital Account Loan Account Sales Account Accounts Receivable Account Pound 50.000 Balance B/D Pound 40.

000 Credit Balance C/D Pound 3.Delivery Van Account Debit Bank Account Balance B/D Pound 3.000 .000 3.000 3.000 3.

Petrol Account Debit Bank Account Pound 100 Credit Balance C/D Pound 100 100 Balance B/D 100 100 .

Interest Account Debit Bank Account Balance B/D Pound 200 200 200 Credit Balance C/D Pound 200 200 .

Loan Account Debit Bank Account Balance B/D Pound 35.000 35.000 Credit Balance C/D Pound 35.000 35.000 .000 35.

000 50.000 50.000 50.000 Credit Bank Account Balance B/D 50.000 Pound .Capital Account Debit Balance C/D Pound 50.

000 40.000 40.000 .000 Credit Balance C/D Pound 40.Business Unit Account Debit Bank Account Balance B/D Pound 40.000 40.

000 15.000 30.000 15.000 Credit Cost of the Goods sold account Balance C/D Pound 15.000 30.000 20.Inventory Account Debit Bank Account Accounts payable Account Balance B/D Pound 10.000 .

Sales Account Debit Balance C/D Pound 25.000 Pound 25.000 25.000 Balance B/D 25.000 .000 20.000 Credit Bank Account Accounts Receivable Account 5.

000 Pound .000 Pound Credit Bank Account Balance C/D 4.000 Balance B/D 16.Accounts Receivable Account Debit Sales Account 20.000 20.000 20.000 16.

000 20.Account Payable Account Debit Balance C/D Pound 20.000 Pound .000 20.000 Balance B/D Credit Inventory Account 20.000 20.

000 15.Cost of Goods sold account Debit Inventory Account Balance B/D Pound 15.000 Credit Balance C/D 15.000 Pound .000 15.000 15.

000 Loan Account Sales Account 35.000 200 16.000 Wage Account 500 1.000 Petrol Account Delivery Van Account Interest Account Accounts Receivable Account Business Unit Account Cost of The Goods sold Account 100 3.000 1.30.200 15.000 20.000 40.000 15.30.Trial Balance Debit Bank Account Inventory Account Pound 40.000 .000 25.000 Credit Capital Account Accounts Payable Account Pound 50.

200 .000 10.400 Interest Net Profit -200 9.000 Operating Expenses: Petrol -100 Wages -500 Operating Profit 9.000 -15.Profit & Loss Account Sales COGS Gross profit 25.

00 Pound 1.00 (+)Net Profit 9.00 16.00 59.200.200.00 3.000.00 1.000.Balance Sheet Assets Non-Current Assets: Delivery Van Business Unit Current Assets: Closing stock (inventory) Accounts Receivable Bank 15.200.14.000.200.00 40.00 20.14.00 Pound Capital & Liabilities Capital 50.000.200.00 Current Liabilities: Accounts Payable Non-current Liabilities: Loan 35.00 .00 40.000.000.000.

000 41 .Sarah’s Balance Sheet a Assets Cash at bank £ 50.000 Capital and Liabilities Owner’s capital 50.

000] Capital and Liabilities Owner’s capital Loan £ 85.000 35.000 50.000 85.000 42 .Sarah’s Balance Sheet b Assets Cash at bank [50.000+35.

000 40.000f –4.200 114.000a +35.000e +20.000b) Motor van (+3.Balance sheet as at the end of June Assets Bank account £ Claims Capital (+50.000e –15.000 .000e) 20.000f) 15.000d – 10.000f 59.000e +5.200 43 35.000i –200j) Business unit (+40.000b –40.000i) 16.000 114.000a –15.200 Long-term creditor – Commercial Loan Company (+35.000f +5.000f –500g –100h –200j) £ (+50.000 (+20.000 Trade debtors (+20.000f –500g – 100h +4.000c) 40.200 +20.000c – 3.000d) Stock-in-trade (+10.000 Trade creditors 3.

Learning Objective C Interpretation of Balance Sheet Information 44 .

• However. – Subjective valuation rules – May exclude important assets. 45 . – Financial Structure: appropriate mix of owned and borrowed capitals. – Asset Mix: appropriate mix of fixed and current assets.B/S Interpretations • B/S limitations: – The value of assets may not reflect current value. B/S provides useful insights to the financial health of a business: – Liquidity: ability to pay short term liabilities.

Current Ratio • Indicator of short-term liquidity • Current Asset/Current Liability 46 .

8 47 .000 = 2.Skylight Limited • Current Ratio (CA/CL) • 1.150.000/410.

48 . • Home Task – Review self-assessment question 2.Home Task • Activity – Try to assess the financial health of Skylight Limited on the basis of balance information provided. P.1.47 of your text book.

49 .

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