Management Accountancy : Balance Sheet

A balance sheet is made up of three distinct sections and is designed to demonstrate the current “worth” of a company, when used in conjunction with the other financial statements (cash flow and income statement).  The BS is sometimes referred to as a statement of financial position.  

The value of the assets should always equal the total claims on the business.

Assets

An asset is something that is essentially worth something or brings value to the company, the most commonly thought of assets are buildings, vehicles and land, although assets are more far reaching than this.

Non-Current Assets (NCA)

NCA are stable throughout the financial year, this can be machinery, property etc.  Typically machinery and vehicles are subject to depreciation (see future post).

Current Assets (CA)

CA are instable and subject to frequent change throughout the space of a financial year.  Typically trade receivables (payments from customers) are classed as CA.  Although assets can be as detailed as prepaid tax/bills (i.e. for the following financial year).

Claims

Claims are an obligation to provide cash or some other benefit to an outside part.  Claims are classified as Equity/Capital and Liabilities:-

Liabilities

Liabilities are the opposite of assets and are essentially things that will cost the company money, it is important to note that liabilities are to be paid, liabilities are not counted once paid, as they have essentially been dealt with.

Non-Current Liabilities (NCL)

NCL are liabilities are similar to NCA in that they are unlikely to change through the space of a financial year; an example of an NCL is long term borrowing.

Current Liabilities (CL)

CL are similar to their asset counterpart CA, and frequently change throughout the financial year.  A typical example of a CL is Trade Payables (i.e. payments made to suppliers).  Again in a similar vein to CA, CL can contain such values as deferred tax/bills.

Equity/Capital

This represents the claim that the owner/shareholder places on a business (their “cut”).  Profit is also included and is calculated from the Income Statement (IS).

Original – Represents money put into the business, typically the start up capital

Profit – Sourced from the income statement

Drawings/share dividend – Money taken out of the business by the owners/shareholders

Simple Balance Sheet example

Acme Ltd Balance sheet as of 31st December 2009 Assets Cash at bank 20,000 Total Assets 20,000 Liabilities & Equity Liabilities Borrowing 6,000 Equity Owners capital 14,000