Balance Sheet

Balance Sheet Balance sheet - the essence

The balance sheet shows what is owned (the value of assets), what is owed (its liabilities) and what is left (owners equity) Basically it records the value of assets owned, what the business owes to others and how it was financed It provides a concise snapshot of a companys financial position It measures the financial standing or the net worth of a company at the end of a given point in time The format of a companys balance sheet is defined by the Companies Act 1985

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet Compare with the P&L Account

P&L Account Main elements: income (revenue) expenses (costs) profit or loss Period covered usually a year Main focus profits Balance sheet Main elements assets liabilities capital Period covered a point in time Main focus value of net assets

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet Horizontal format

Assets Fixed assets + Current assets Liabilities Shareholders funds + Long term liabilities + Current liabilities

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet Assets

Assets are what the firm owns and what it is owed to the firm. They are the resources the company uses to conduct business Alternatively, they can be seen as everything the firm owns that has a monetary value. Something owned by the business that has a measurable cost Assets bring economic benefit though their sale (e.g. stocks) or use (e.g. equipment)

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet Types of assets

Assets can be subdivided into: Fixed assets provide a benefit for more than 12 months tangible fixed assets (e.g. equipment) intangible fixed assets (e.g. goodwill) financial assets (e.g. investments in other companies) Current assets provide a benefit for less than 12 months stocks debtors or amounts receivable cash prepayments

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet Liabilities

Liabilities refer to amounts the firm owes to others and which have monetary value It is the amounts that the business is obliged to pay to other people and organisations Liabilities can be:
short term (current liabilities) long term capital-liability owed by the business to the owner

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet A word of caution

A balance sheet is a snapshot at a particular point of time Balance sheet items can be window dressed The balance sheet does not reveal the value of a business since it is unlikely to record the current value of intangible assets or the current value of property It does not record qualitative factors (e.g. the quality of the fixed assets)

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet What it does not show

A companys market worth Intangible assets e.g. knowledge, skills of the workforce Vital business factors such as market share Trends that affect performance The true value of some fixed assets The position after the date on which the balance sheet is constructed

Balance Sheet_v1

Dr. Harald Fien

Balance Sheet Lessons Learned

What is a balance sheet. Explain some of the key terms of a balance sheet. What are assets? What are liabilities? What does a balance sheet not show?

Balance Sheet_v1

Dr. Harald Fien

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