The Balance Sheet Equation
Assets = Liabilities + Capital
Capital =Assets -Liabilities
Liabilities=Assets-Capital
Assets- Things owned by the business eg. Motor vehicles,
cash (cash in hand, Cash in Bank, Debtors), furniture,
machinery, fixtures, land, buildings, equipment,
computers, printers, etc.
Assets can be divided into two categories:
Fixed Assets/Non current Assets are physical or tangible
long lived assets a company owns, and uses in its business
operations to provide services and goods to its customers
and help drive income. These assets, which are often
equipment or property, provide the owner with long-term
financial benefits. They are listed in the non-current asset
section on a company's balance sheet because their useful
lives extend beyond one year. They are listed in order of
permanence. I.e. The asset with the longest life first, down
to the asset with the shortest lifespan.
Example: Non-Current Assets
Land
Building
Fixtures and Fittings
Machinery/Equipment
Motor Vehicle
Furniture
Current Assets- A current asset, also known as a liquid
asset, is any resource/asset a company could use, turn into
cash, or sell within a year. This includes cash in the bank,
money that customers owe (accounts receivable), goods
ready to be sold (inventory), and other investments that can
be easily offloaded. Therefore Current assets are of a
shorter lifespan, less than a year and are easily converted
to cash and includes cash itself. They are arranged in order
of liquidity with the least liquid asset first, down to cash
itself, the most liquid asset. Liquidity is the ease of
conversion to cash.
Example
Current Assets
Stock/Inventory
Debtors/ Accounts Receivable
Cash at bank
Cash in hand.
Liability- Debts owed by the firm. Money the business
owe. eg. creditors, loan, mortgage, bank overdraft etc.
Two categories of liabilities exists:
Current Liabilities eg Creditors/Accounts Payable, bank
overdraft.
Long term Liabilities eg. Mortgage, Loans
Capital-Owners Investment/ Equity- money or things the
owner brings into the business. Money or things used to
start the business. There are two types of Balance sheet
format used:
Vertical and Horizontal, we will look at both below:
The Vertical Style
The Simple Balance Sheet
Name of Company/sole trader
The Balance Sheet as at (date)
Non Current Assets $ $
Premises 1000
Fixtures and Fittings 1000
Furniture 1000
Motor Vehicle 1000
Total Non Current Assets 4000
Current Assets
Inventory 1000
Accounts Receivable/Debtors 1000
Bank 1000
Cash 1000
Total Current Assets 4000
Less Current Liabilities
creditors 1000
Net Current Assets/working Capital 3000
7000
Less Long term liability
Loan: A. Person 2000
5000
Financed By
Capital 5000
The Horizontal Style
Name of Company/sole trader
The Balance Sheet as at (date)
Non Current Assets $ Capital &Liablities $
Premises 1000 Capital 5000
Fixtures and Fittings 1000
Furniture 1000 Current Liability
Motor Vehicle 1000 Creditor 1000
Current Assets
Inventory 1000 Long term Liability
Accounts 1000 Loan:A. Person 2000
Receivable/Debtors
Bank 1000
Cash 1000 ____
Total Assets 8000 8000
Activity
Convert the information below into a horizontal
style Balance Sheet.
Balance Sheet
Assets Capital + Liabilities
Premises 20000 Loan B. Bevan 12000
Motor vehicle 8000 creditor 1600
Inventory 4000 Capital 21600
Cash in Bank 2800
Cash in hand 400
35200 35200
