Understanding a Balance Sheet

Basic Principles of a Balance Sheet

Most businesses borrow money to help them

to operate.
A balance sheet has a special section – called
liabilities. This shows how much money has
been borrowed or invested – and where it came
from.
The term ‘balance’ means that all the money
invested or borrowed must be accounted for in
another section, called assets.
 What are Assets?

Fixed assets are items owned by the company

which:
last a long time e.g., buildings, vehicles,
computers.
cost a lot of money.
could be sold to increase capital (i.e. money owned
by the business).
 What are Assets?

Current assets include:

Items used and replaced regularly e.g., raw materials
or stock.
Customers who owe money (called debtors) for goods
they have bought.
Money in the current bank account.
 What are Liabilities?

Current liabilities are:

 Money the business owes to suppliers (called

creditors) for goods purchased on credit.

Short term loans.

 What are Liabilities?

Liabilities also includes capital and reserves.

Share capital is money which shareholders have

invested in the business.
Reserves = profit from previous years which has been
kept to finance future developments.
Profit and loss account = money kept back from
the current year’s profits.
 The structure of a Balance Sheet – Assets
Fixed assets €
Buildings 60,000
Equipment 20,000
Total fixed assets 80,000
Current assets
Stock 20,000
Debtors 10,000
Cash at bank 10,000
Total current assets 40,000
(Total assets = €120,000 but this figure doesn’t show)
 The structure of a Balance Sheet– Current liabilities
LIABILITIES
€
Current liabilities
Creditors -10,000

Working Capital 30,000

(This is the current assets - €40,000 - minus the current liabilities)

Total Net Assets 110,000

(This is the total assets - €120,000 - minus the current liabilities)
 The structure of a Balance Sheet– Capital and Reserves

Financed By: €

Accumulated Fund 70,000

Surplus of Income 40,000

Capital Employed 110,000

(This is the total amount in Capital and Reserves. It must equal
the same amount as the total assets minus current liabilities).
 Putting it all together
ASSETS
Fixed assets (assets listed)
Total fixed assets
€80,000 A
Current assets (assets listed)
Total current assets €40,000 B

LIABILITIES
Current liabilities –€10,000 C
Working Capital €30,000 B–C
Total Net Assets €110,000 A+B–C
Financed By: (all listed)
Capital Employed €110,000 D
 ‘Reading’ a Balance Sheet

Both the balance sheet and the profit and loss

account show the ‘health’ of the business

Shareholders, customers, suppliers, employees

and other groups of people will be interested
in both types of account.
 Key aspects of a Balance Sheet

Fixed assets – is there enough money secured in

items which could be sold to raise capital?
Cash in bank – is there enough to cover a
short- term crisis?
Working Capital– if this figure is negative, the
business hasn’t enough money to pay all the
creditors in a reasonable time.
Shareholders’ funds – are these
increasing? Shareholders want their
investment to grow.