SUBJECT: Business Studies CLASS: Year 9

WEEK:
TOPIC: BALANCE SHEET

LEARNING OBJECTIVES:
At the end of the lesson, students should be able to;
- Explain the meaning of balance sheet
- State the content of balance sheet
- State the uses balance sheet
- Classify assets into fixed and current assets.
- Distinguish between capital and liabilities.
- Differentiate between vertical and horizontal balance sheets

BALANCE SHEET
Meaning of balance sheet
A balance sheet is a financial statement which shows the assets and liabilities of a business at a
particular date. It shows the value or worth of a business at just one moment in time – not before, nor
after.

Uses of the balance sheet.

• The balance sheet shows what the business owns.
• It shows what the business owes other business.
• It shows what the business owed.
• The business’s net-worth is also shown in a balance sheet.
• The balance sheet displays the working capital of a business.
• It shows the current financial performance.
• It depicts the prospect of a business.

Content of a balance sheet

Items on the balance sheet

Capital Assets Liabilities

Fixed assets Current assets

Current liabilities long term liabilities

Capital:
This is the amount of money used to start a particular business. Capital can also be referred to as the
owner’s investment in the business.

Assets:
These are the materials, resources or properties used in the running of the business. These assets
include:

Fixed Assets Current Assets

• Land and Building • Inventory
• Machinery • Debtor
• Equipment • Payment in advance
• Furniture • Cash at bank
• Generator • Cash in hand
 • Motor Vehicle

As listed above, fixed assets are the property or resources which can be used in a business for more
than one year while current asset consist of cash and other items which can be converted into cash
within a year
Liabilities:
These are debts which a business is expected to repay sooner or later. The classes of liabilities are
shown in the table below.

Current (short-term) liabilities Long term liabilities

Creditor Bank loan
Overdrafts Debentures
Accrued expenses Mortgages

Current liabilities: these are debts which a business must pay back within one year. They are also
known as short-term liabilities.
Creditors: are people or business to which we are financially indebted. It means we owe them and we
must pay back.
An overdraft: is a form of short-term finance where a business is allowed to withdraw an amount
greater than what is in its account. It must be repaid within a year.
Accrued expenses: are also called payment in arrears

Long term liabilities: These are debts which a business does not need to pay back within a year. It
takes a longer time to pay back a long-term liability.
Bank loan: is a large amount borrowed at a rate of interest subject to the provision of collateral.
Debentures: is a long-term loan certificate issued to a creditor to raise finance
Mortgage: is a long term loan meant for a building project.

NB: note that net profits or losses from profit and loss account must be recorded in the balance sheet.
If a business makes a net profit, it should be added to the capital in the balance sheet.
However, a net loss is deducted from capital in the balance sheet.
Sometimes, the owner of a business might take some money from the business for personal use. This
is called drawing. The amount of drawing must be deducted from the capital
Differences between capital and liabilities

Both capital and liabilities are debts owed by a business. But the difference between the two terms is
that capital is the debt which a business owes the owner while liabilities are debts which the
business owes outside parties
Preparation of a balance sheet T-format

Balance Sheet
N N N N
Capital xxx fixed assets
Add profit xx Building xxx
 xxx Machinery xxx
Less drawings xx Furniture xxx
xxxx xxxx
Long term liability Current assets
Bank loan xx Stock xx
Short-term loan Debtors xx
Overdraft xx Cash at bank xx
Creditors xx xxx Cash in hand xx xxx
xxx xxx

Note that assets are arranged on the right-hand side, while liabilities are listed on the left- hand side.

Vertical-format
Balance Sheet
N N N
Fixed assets
Building Machinery xxx xxx
Furniture xxx
xxxx

Current assets
Stocks xxx

Debtors xxx
Cash at bank Cash in xxx
hand xxx
xxx
Less: Current liabilities
Overdraft xx xx
Creditors

xxx
Working capital xxxx
Net assets xxxx
Financed by:
Capital xxx
Add net profit Less xxx xxx xx
drawings

Add: Long term liability

Bank loan xxx

Capital employed xxx

xxxx

Example
Use the following to prepare a balance sheet for Baba Alagbado Stores as at October 29, 2015 N
Bank loan 2450
Creditors 400
Capital 5000
Machinery 6000
Stock 500
Building 4400
Debtors 600
Bank overdraft 600
Net profit 3200
Cash 150

Solution to be given in the class.