Balance Sheet Words
Is a useful rule which helps when assembling the balance sheet figures. The rule which is always true is that:
Assets - Liabilities = Capital
Fixed Assets + Current Assets -Current Liabilities - Long term Liabilities = Capital + profit - drawings
This means that when preparing a balance sheet there will always be two figures which are the same and we refer to this state as the the balance sheet balancing
Used to help make sense of the figures and include the following categories:
- Profitability ratios , used to compare the profitability of one company with another or of one company over time.
- Liquidity ratios, used to compare the liquidity of one company with another or of one company over time.
- Investment ratios, used by potential investors when making investment decisions.
- Efficiency ratios, used to compare company efficiency with others or with itself from one year to another.
Accounting ratios are only useful when used to compare:
- one company's results over a period of time.
- one company's results with another company. It is best to compare with the best ,such as a world class company, or to compare with the industry standard for that type of business.
- the company's results with those expected. It is useful to use budgets for this purpose.
An amount unaccounted for, yet still owed at the year end. The amount needs to be estimated and then added to the expenses deducted from the profit in the Profit and Loss account. The same amount also needs to be added to Trade Creditors in the Current Liabilities section of the Balance sheet.
An item of value owned by the business.
A financial statement that shows what the business is worth. This is a very simple definition as the valuation of a business is a very complex topic. It shows the business assets and liabilities at one point in time and is sometimes referred to as the "snap shot".
Bank & Cash
Amounts held in the bank and in cash. Found in the Current Assets section of the Balance Sheet. If the amounts are in deficit, then the bank account is said to be an overdraft and will not appear in current assets but will be found in the Current Liabilities section of the balance sheet.
Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of:
- Share Capital (which comes in two varieties ordinary and preference)
- Loan capital (which is simply a grand name for long term loans)
Money. Can be in the petty cash tin in the office or at the bank.
Assets which are expected to be used up and replaced within one year. Sometimes referred to as short term assets.They can be :
- stocks of finished goods or raw materials or partially finished good known as work in progress. This amount is also referred to as closing stock and can be found in the Trading account section of the Profit and loss Account. It is important to remember that Closing stock appears both in the Balance sheet and in the Profit and Loss Account.
- amounts owed to the business from its customers and known as Debtors. Customers come in two varieties:
- Cash customers which pay for goods at the time of sale
- Credit customers which pay for goods at a later date. It is from these sales that debtors arises i.e. amounts owed from customers.
This amount is usually shown net of Doubtful debts(which means having the amount of doubtful debts deducted from the total figure for debtors) The deduction for Doubtful debts is usually an estimate and is known as a Provision (meaning estimate) for doubtful debts. It represents amounts under dispute with customers or amounts which customers are having difficulty in paying because of cash flow problems. Income arising from these amounts is therefore considered doubtful.
- amounts paid in advance (at the end of the accounting year) of goods and services received and referred to as prepayments. Prepayments are shown as added to debtors.
- cash and bank
Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be:
- Trade creditors, which is the name we give to amounts owed to suppliers.
- Accruals, which is the name we give to amounts still owed at the year end and not yet recorded in the books of account.
- Proposed items such as Dividends proposed, which means amounts the business promises to pay in the coming year.
- Payable items such as Tax payable which is payable within the coming year.
- Overdraft, which is amounts owed to the bank.
- Short term loans.
Is the measure of wearing out of a fixed asset. All fixed assets are expected to wear out, become less efficient and to get "tired". Depreciation is calculated as the estimate of this measure of wearing out and is a charge in the Profit and loss Account. Accumulated Depreciation is the total depreciation charges to date deducted from the cost of the fixed assets to show Net Book Value in the Balance Sheet.
Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In company accounts the withdrawal of assets by the owners is either called :
- salaries if it is payment for work done by the owner or
- dividendsif it is for a share of the profits
Assets used within the business and not acquired for the purposes of resale. Examples include:
- Land and buildings
- Plant and machinery, such as knitting machines and cup making machinery
- Fixtures and fittings, such as light fittings and shelving
- Motor vehicles, such as vans and cars.
Fixed assets must be shown at original cost(purchase price) or valuation. Valuation is preferred in the case of assets which have changed significantly in value since original purchase. For example the current value of land and buildings can be quite different from the original cost.
Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give net book value
Comes in two flavours:
- Inherent goodwill, which is supposed to reflect the reputation and other positive characteristics of the business which are all difficult to put a value on. This type of goodwill should not appear on the Balance Sheet
- Purchased goodwill, which is the excess of purchase price over fair value of the net assets of the business acquired by the purchaser.
The law controls what kinds of books, records and systems of internal controls that must be maintained by companies which are subject to an annual examination by external auditors. You will learn much more about these in your studies.
Long term Liability
Amounts owed to someone else which are payable after one year. Examples include:
Net current assets
- Long term loans
- Debentures , which are long term loans secured on the business assets. This means if the business fails to repay back the loan on time the business assets are at risk.
Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities and is what finances the business on a day to basis.
Is the difference between the total assets and total liabilities.
There are many types of profit:
- Cash surplus, which is the difference between receipts and payments.
- Taxable profit, which is the business profit adjusted for tax purposes.
- Accounting profit, which is the difference between:
- Income received or receivable and
- Expenditure paid or payable within an accounting period Often referred to as NET Profit
Accounting profit is calculated using the accruals or matching concept. Which means that the total income includes not only cash received but also amounts owed by credit customers (debtors) for sales made within the accounting period. The total costs incurred to achieve these sales include not just actual payments made , but also amounts still owing to suppliers. Accounting profit is normally referred to as Net Profit which is Gross profit less Expenses.
Amounts retained in the business and not distributed to owners. Reserves can be:
- Profits made and not passed on to owners. These are some times known as retained earnings.
- Capital reserves which can not be passed on to owners and represent the perceived increase in valuation of some fixed assets.
Amounts invested in a company by its owners. Owners of companies are called shareholders.