IB Business and Management

3.5 Balance Sheets

 Learning Outcomes
• Explain the purpose of a Balance Sheet
• Construct and amend accounts from information given
 Starter Challenge – 1 minute
List ten items that you expect to see in a Profit
and Loss Account*

* If
you’ve finished early…. Put them in order that they would
appear
 What is a Balance Sheet?
• A balance sheet is a statement of the total assets and liabilities
of an organisation at a particular date - usually the last date
of an accounting period.
 About Balance Sheets
• The balance sheet is a picture of a
company’s financial situation at a
moment in time – a snap shot

• The idea behind it is simple – it

records where the business got its
money from and what it has done
with it

• It shows what a business owns

(assets), what it owes
(liabilities) and how it paid for
this…
 What does the Balance Sheet show?
• Balance Sheets have 2 sections

Net Assets
A statement of fixed assets, current assets and the current
liabilities

Capital Employed
A statement showing how the Net Assets have been financed
Let’s make sure you’re clear on what Assets and Liabilities are

LET’S REWIND….
 Key Questions….
• What is meant by the term ‘Asset’?
• What are Fixed Assets?
• What are Current Assets?
• What is meant by the term ‘Liability’?
• What is the difference between a ‘Current Liability’ and a
‘Long-term Liability’?
Assets – Things that the business owns
or is owed
Fixed Assets
• An asset that is not consumed
or sold during the normal
course of business
• Fixed assets enable their owner
to carry on its operations
• On a balance sheet, these
assets are shown at their book
value (purchase price less
depreciation).
Current Assets
• An asset such as constantly
flowing in and out of an
organization in the normal
course of its business.
• In accounting, any asset
expected to last or be in use for
less than one year is
considered a current asset
Which of these are fixed assets and which are current
assets for a restaurant?

Premises
£300,000 Cash in Bank
Computer £3,000
£300

Stationery
£150
Debtors Kitchen Equipment
£1,000 £15,000

Stocks of ingredients
£800
Furniture Van
£8,000 £12,000
 Liabilities – Things that the business
owes
Current Liabilities Long-term liabilities
• A balance sheet section • A section of the balance sheet
that lists obligations of the
which shows the sum of company that become due
money owed by a business more than one year into the
which is due within one future.
• The portions of long-term
year liabilities that will come due
within the next 12 months are
listed under current liabilities
Which of these liabilities are current and
which are long-term?

Creditors Overdraft
£1,000
Unpaid Dividends
£10,000

Hire Purchase Balances

£8,000
Bank Loan Debentures
£15,000 £100,000
 Capital… In the accounting context
• Money invested in a business to
generate income

• Share Capital – is provided by

the shareholders through the
purchase of shares
• Reserves – refer to past profits
that have been kept in the
business rather than paid out as
dividends (retained profit)
BALANCE SHEET – THE
FORMAT
Very Important……
 Balance Sheet - Mr Reading's Burger Bar Ltd - 31st March 2005
Fixed Assets          
 Property     80  
 Machinery     40  
 Vehicles     30  
          150 
Current Assets          
  Stock     5   
  Debtors     12    What it’s
  Cash     3    doing with
        20    its money
Current Liabilities        
  Creditors   14     
  Unpaid Tax   1     
        15   
Net Current Assets (Working Capital)     5 
Net Assets         155 
             
Financed by:          
Shareholder's Funds          
  Share Capital These
  two    80  Where its
  Retained Profit figures
  must    50  got it money
Long Term Liabilities   balance
        from
  Bank Loan       20 
  Debentures     5 
  Capital Employed     155 
 Balance Sheet - Mr Reading's Burger Bar Ltd - 31st
March 2005
          business
The   has bought
some fixed assets
            
Fixed Assets         
 Property      80 
 Machinery       40 
 Vehicles      30 
         150 

Fixed Assets will last for MORE THAN

ONE YEAR – they will have
depreciated
 Raw materials
Current Assets          or finished
products it
  Stock    5    hasn’t sold
Liquidity of
assets
  Debtors    12   
increases
  Cash    3   
People who
       20    owe the
The most liquid business e.g.
– money the trade credit
firm hasn’t
spent
 They have to
Current Liabilities       be paid
within one
year of the
  Creditors   14    date of the
Balance
  Unpaid Tax   1   
Sheet
        15 
The opposite to
debtors – the
business owes
them. This is
money owed to
suppliers
 Fixed Assets        
 Property       80 Working
 Machinery       40 Capital=
 Vehicles       30 Current Assets
          150
Current Assets        
– Current
  Stock     5  Liabilities
  Debtors     12 
  Cash     3  Does the
        20  business have
           
enough capital
Current Liabilities      
  Creditors   14  to pay off its
  Unpaid Tax   1  short-term
        15  debts?
           
Working Capital     5
Net Assets         155

Net Current Assets + Fixed Assets = Net Assets. This is the

net worth of the business – everything its spent its cash on!
           
Financed by:        Money put into
business from
Shareholder's
share issue
Funds       
  Share Capital      80 All the profit
  Retained Profit      50 retained for
Long Term future
investment
Liabilities       
Bank Money that is
  Loan      20 borrowed from
  Debentures    5 other people –
  Capital Employed    155 debts that take
over a year to
Capital Employed is what you get when pay
you add shareholders funds and long
term liabilities. It must equal Net Assets!
Balance Sheet – IB Structure
They keep it simple
• Any Questions?
The Imperial Ltd : Balance Sheet as of 31.12.2013
$ $ $ Calculate the
missing
Fixed Assets 592,000
numbers 1-4
Less Depreciation 1
30,000
562,000 Calculate
Current Assets Working
Stock 2
6,000 Capital
Debtors 2,000
Cash 2,000
10,000
Current Liabilities
Creditors 9,000
Short term borrowing 0
9,000
Net Assets 563,000
3

Share Capital 343,000

Loan Capital 220,000
Capital Employed 4
563,000
 Task – Question Sheet
• Answer all of the questions on the
‘Analysing the balance sheet’ sheet
 IB Question
Selected items from BP’s balance sheet
as at 31 December 2009 (US$ millions)
(a) Outline the importance of the (before the disaster).
balance sheet to two stakeholder
groups of BP. [4 marks]
(b) (i) Using the information
in the selected items from BP’s
balance sheet, calculate the loan
capital (figure X) and construct a
balance sheet for BP as at 31
December 2009. [5 marks]
(ii) Explain how two of the
financial consequences of the
disaster will appear on BP’s
balance sheet as at 31 December
2010. [4 marks]
Have a go at question (b) (i)
8 minutes
Self Assess your work [0 marks]
An incorrect balance sheet and incorrect format and
no title.

….. [1 mark]

An attempt to prepare a balance sheet, but there are

a number of errors in
the calculation, format or the title.
[2 to 3 marks]

A generally correct balance sheet with a number of

minor errors in
calculation, the format of the accounts or in the title.
[4 to 5 marks]

For [5 marks] the balance sheet is completely

accurate, detailed and
appropriately formatted and with the correct title.
For [4 marks] there
may be up to two minor errors, one in calculation,
and the other may be a
slight incorrect format or an incorrect title.
 And one a little bit harder….
Extract from the balance sheet for BBT for
the year ended 31 October 2010
(b) (i) Calculate the missing
figures X, Y, Z and with those
figures and from the financial
information provided, construct a
complete balance sheet for BBT
for 2010. [7 marks]
Try it:
11 minutes
X = 10 500, Y = 48 000, Z = 10 500

Award [1 mark]each for the calculation of (X)

capital employed, (Y) creditors and (Z) net assets.
Peer mark this time
Maximum award for calculations is [3 marks].

In terms of layout, award [4 marks] for a fully

accurate and fully labelled balance sheet that
conforms to the layout in the guide.

If the balance sheet balances but the order of the

assets or liabilities is slightly inaccurate award [3
marks].

If the balance sheet balances but the order of the

assets or liabilities is significantly inaccurate, such
as placing share capital and
retained profit as a liability, award [2 marks].

Award [1 mark] if the candidate conveys some

understanding of a balance sheet and some sense
that assets equal liabilities + owners’ equity.
ADJUSTING THE BALANCE
SHEET
 Task
You are going to make some adjustments to a Balance
Sheet
Read through the information
on Andromeda Plc
For each scenario in Exercise 1
State any effects on:
•Fixed Assets
•Current Assets
•Current Liabilities
•Net Assets Employed
•Capital Employed

Now draw up the amended Balance Sheet for the

changes in Exercise 1
 To sum it all up….
Watch the video
‘The Balance Sheet Explained’

Do you feel like an expert on Balance Sheets now?

Is there anything further you need to clarify?