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Chapter 6 – Balance Sheet Objectives
Define Balance Sheet
Understand the components of the balance sheet
- Assets (Fixed, current and Intangible)
-Liabilities (Long term and current)
Owner’s Equity
Explain the meaning of working capital, capital owned, and capital employed
Balance sheet presentation
Effects of transactions on items in the balance sheet
Effects of transactions on working capital, capital owned and capital employed
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Definition – Balance sheet
Remember?
Trading account measures merchandise profit and Loss (whether the product is profitable), End Result= Gross Profit/Loss
Profit and Loss account measures Net profit/Loss (whether the firm is profitable after considering operating expense and income) End result= Net profit/Loss
Balance Sheet is a financial statement that measures the financial position of the business at a given time.
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Recap
Gross Profit = Sales- Cost of goods sold
Net Profit = Gross profit + All other revnue – operating expense
Balance sheet= Reporting the owner’s equity, assets and liabilities at a given date.
Context:
If you are going to lend a business money, what information would you be interested to know and why?
Discuss in groups and present
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Components of Balance sheet Assets
Resources which a business owned in order to carry out it’s activities
Fixed Assets
- items bought for use in business
operation which are not intended
for resale.
- their benefits extend over more
than an accounting year
- motor vehicles
- furniture
- equipment
- building etc
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Assets-Contd
Intangible
Assets
- assets with no material
form
- their benefits extend over
several accounting periods
- copyrights
- goodwill
- patent
Current Assets - assets which are expected
to be used or converted into
cash within an accounting
period.
- also known as liquid assets
- stock
- trade debtors
- prepaid
expenses
- bank
- cash
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CA
Building
Motor vehicle
ASSETS OF BUSINESS
Cash
Office supplies
Office Equipment
Office furniture
Inventory
FA
FA
FA
FA
CA
CA
CA FA = Fixed Asset = Current asset
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Liabilities They are money owing by a business to others. Their classification is according to when they are due for payment.
Long-term Liabilities - money owing by the business
which are due to be repaid
more than one period from the
Balance Sheet date
- bank loan
- mortgage
Current Liabilities - money owing by the business
which are repayable within
one period from the Balance
Sheet date
- bank overdraft
- trade creditors
- accrued wages
(unpaid wages)
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Bank loan and bank overdraft Mortgage
LIABILITIES OF BUSINESS
Unpaid bills
Creditors
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Owner’s Equity
Owner’s equity represent the owner’s claim on the assets of the business. Also known as net worth
• Owners’ Equity = Owners’ Capital at the beginning + Additional Capital – Drawings + Profits – Losses
Context
Remember how net profit is being transferred to the balance sheet and increases the owner’s equity. Also think of the accounting concept that apply to owner’s equity
Hint “Capital from the owner might be treated as a loan to the business”
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Capital 1. Capital Owned, also known as Net Worth.
Capital Owned = Total Assets – Total Liabilities
2. Capital Employed, The total contributions of owners plus total long term liabilities.
Capital Employed = Owner’s equities + Long term liabilities
3. Working Capital, Refers to the money or other assets which the business has to pay off it’s current liabilities
Working Capital = Current Assets – Current Liabilities
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How does a business measure its working capital ?
Working capital
= Current assets – Current liabilities
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What are the effects of transactions on the working capital?
The working capital will increase, decrease or remain unchanged depending on the effects on the current assets and current liabilities of the business.
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Resource Sheet 14.1: Transactions affecting Lee Trading
1. Trader Lee paid a cheque, $1,200, to his supplier for amount owing. No cash discount was received.
2. Sold half of the goods for $2,300. Cash was banked in.
3. Paid cheque, $20,000, to repay part of the loan.
4. Received a cheque from a customer for payment of amount
owed. Amount owed was $3,000 and 5% cash discount was allowed.
5. Received a cheque, $1,800, for rent of premises by subtenant.
6. Paid cheque, $1,500, for wages.
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Trans Premises
($)
Vehicle
($)
Stock
C.Asset
($)
Debtors
C.Asset
($)
Bank
C. Asset
($)
Capital
($)
Net Profit
($)
Loan
($)
Creditors
C. Liability
($)
Balance
(opening)
90,000
40,000
34,000
7,500
15,000
82,500
60,000
44,000
Trans 1
—12,000
—12,000
Trans 2 —17,000
23,000
6,000
Trans 3 —20,000
—20,000
Trans 4 —3,000
2,850
—150
Trans 5 1,800
1,800
Trans 6 —1,500
—1,500
Balance
(closing)
90,000 40,000
17,000
4,500
9,150
82,500
6,150
40,000 32,000
1.The table below shows an analysis of transactions on the balance sheet items of Lee Trading.
2. Working capital = Current assets – Current liabilities. Transactions affecting working capital concern only the shaded columns (ie current assets and current liabilities).
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Trans Increase in working capital
($)
Decrease in working capital
($)
No effect on working capital
($)
Balance
of working capital ($)
Explanation
31 July 12 12,500 The difference between current assets and current liabilities (Balance Sheet as at 31 July 2007)
Trans 1 X 12,500
A decrease in current assets is matched by a decrease in current liabilities
Trans 2 6,000 18,500 Net increase in current assets increases working capital
Trans 3 —20,000 Decrease in current assets causes decrease in working capital
Trans 4 —150
Net decrease in current assets causes decrease in working capital
—1,500
—1,650
Trans 5 1,800 150 Increase in current assets increases working capital
Trans 6 —1,500 —1,350
Decrease in current assets decreases working capital
7,800 —21,650
Working capital on 31 July 2007 decreases from 12,500 to -1,350 as a result of an overall net decrease in working capital (-13,850) during the one week period .
Total
An analysis of transactions on working capital of Lee Trading during the week ending 7 August 2012
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Capital Owned
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Trans Premises
F. Asset
($)
Vehicle
F. Asset
($)
Stock
C. Asset
($)
Debtors
C. Asset
($)
Bank
C. Asset
($)
Capital
O. Equity
($)
Net Profit
O. Equity
($)
Loan Long-term Liability
($)
Creditors
Current Liability
($)
Balance
(Opening)
90,000
40,000
34,000
7,500
15,000
82,500
60,000
44,000
Trans 1
—12,000
—12,000
Trans 2 —17,000
23,000
6,000
Trans 3 —20,000
—20,000
Trans 4 —3,000
2,850
—150
Trans 5 1,800
1,800
Trans 6 —1,500
—1,500
Balance (closing)
90,000 40,000
17,000
4,500
9,150
82,500
6,150
40,000 32,000
1. Capital owned = Assets — Liabilities
2. An analysis of transactions on capital owned concerns only the shaded columns ―owner’s equity‖ (ie capital, net profit and drawings, if any.)
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Trans Increase in capital owned
($)
Decrease in capital owned
($)
No effect on capital owned
($)
Balance
of capital
owned ($)
Explanation
31 July 07 82,500 The difference between total assets and total liabilities (Balance Sheet as at 31 July 2007)
An analysis of transactions on capital owned of Lee Trading during the week ending 7 August 2012.
Trans 1
Trans 2
Trans 3
Trans 4
Trans 5
Trans 6
Total
X
X
6,000
82,500 No effect on capital or profit
No effect on capital or profit
Profit increases capital owned 88,500
88,500
—150 88,350 Net profit is decreased by discount allowed
1,800 90,150 Net Profit is increased by revenue earned
—1,500 88,650 Net Profit is decreased by wages paid
7,800 —1,650
Capital owned increases from $82,500 to $88,650 as a result of an overall increase of $6,150 in owner’s equity
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Capital Employed
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Trans Premises
F. Asset
($)
Vehicle
F. Asset
($)
Stock
C. Asset
($)
Debtors
C. Asset
($)
Bank
C. Asset
($)
Capital O. Equity
($)
Net Profit
O. Equity ($)
Loan Long-term Liability
($)
Creditors
Current
Liability
Balance
(Opening)
90,000
40,000
34,000
7,500
15,000
82,500
60,000
44,000
Trans 1
—12,000
—12,000
Trans 2 —17,000
23,000
6,000
Trans 3 —20,000
—20,000
Trans 4 —3,000
2,850
—150
Trans 5 1,800
1,800
Trans 6 —1,500
—1,500
Balance (closing)
90,000 40,000
17,000
4,500
9,150
82,500
6,150
40,000 32,000
1. Capital employed = Capital owned + Long-term Liabilities
2.Analysis of effects of transaction on capital employed concerns the shaded columns (eg Capital, Net Profit and Loan)
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Trans Increase in capital
employed
($)
Decrease in capital
employed
($)
No effect on capital
employed
($)
Balance of capital
employed ($)
Explanation
31 July 07 142,500 The sum of capital owned and long term liabilities (Balance Sheet as at 31 July 2007)
An analysis of transactions on capital employed of Lee Trading during the week ending 7 August 2007.
Trans 1
Trans 2
Trans 3
Trans 4
Trans 5
Trans 6
Total
X
—20,000
6,000
142,500 No effect on capital , profit or long-term liability
Repayment of loan decreases long-term liability
Profit increases capital employed 148,500
128,500
—150 128,350 Net profit is decreased by discount allowed
1,800 130,150 Net Profit is increased by revenue earned
—1,500 128,650 Net Profit is decreased by wages paid
7,800 —21,650 Capital employed decreases from $142,500 to $128,650 as a result of an overall decrease of $13,850 in owner’s equity and long-term liability.
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Building
ASSETS LIABILITIES
BALANCE SHEET
Equipment
Debtors
Stock
Cash
Capital
Loans
Creditors
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Balance Sheet as at 31 July 2012
$ $
Assets
Premises 90,000
Vehicle 40,000
Stock 34,000
Debtors 7,500
Bank 15,000
Owner’s Equity
Capital 82,500
186,500
Liabilities
Creditors 44,000
Loan 60,000
186,500
Activity: Redraft Lee Trading’s Balance Sheet as at 7 August 2012 after taking into account the transactions that took place during the week.
Lee Trading
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Vehicle
($)
Stock
($)
Debtors
($)
Bank
($)
Capital
($)
Net Profit
($)
Loan
($)
Creditors
($)
Balance 90,000 40,000 34,000 7,500 15,000 82,500 60,000 44,000
The table below shows the opening balances of assets, owner’s equity and liabilities at the beginning of the week, 1 August 2007. Trans 1: Trader Lee paid a cheque of $12,000 to his supplier for amount owing. No cash discount was received.
-12,000 -12,000
Trans 2: Sold half of the goods for cash $23,000. Cash was banked in.
Trans 1
Trans 2 -17,000 23,000 6,000
Trans 3 -20,000 -20,000
Trans 4 -3,000 -150 2,850
Trans 3: Paid cheque $20,000 to repay loan.
Trans 4: Received a cheque from a customer for payment of amount owed. Amount owed was $3,000 and 5% cash discount was allowed.
Trans 5: Received a cheque $1,800 for rent of premises by subtenant.
Trans 5 1,800 1,800
Trans 6 -1,500 -1,500
Balance 90,000 40,000 17,000 4,500 32,000 40,000 82,500 6,150 9,150
160,650 88,650 Total
Trans 6: Paid cheque $1,500 for wages.
+ 72,000 =
Premises
($)
Trans
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Lee Trading’s Adjusted Balance Sheet:
Balance Sheet as at 7 August 2012
$ $ $ $
Fixed Assets Owner’s Equity
Current Assets Long Term Liabilities
Current Liabilities
Premises 90,000
Vehicle 40,000
130,000
Stock 17,000
Debtors 4,500
Bank 9,150 30,650
160,650
Capital, 1 Aug 82,500
Add Net Profit 6,150
Capital, 7 Aug 88,650
Loan 40,000
Creditors 32,000
160,650
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1. The Balance Sheet is not an account.
2 It does not have a debit or a credit side like final accounts.
3. The balance sheet items have been arranged in such a way that the debit balances equal the credit balances.
4. The balance sheet items can be rearranged to give meaningful information.
Balance Sheet as at 31 Dec 2012
$ $ $ Fixed Assets
Building 80,000
Vehicle 70,000
Equipment 10,000 160,000
Current Assets
Stock 6,500
Debtors 9,000
Bank 8,000
Petty cash 100 23,600
183,600
Owner’s equity
Capital 1.1.07 50,000
Add Net Profit 7,000
57,000
Long Term Liabilities
Bank loan 90,000
Current Liabilities
Creditors 36,600
183,600
Less Working capital (13,000) 147,000 147,000
Capital employed 147,000
Capital owned
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$ $ $ $
Fixed Assets Owners’ Equity
Premises x Capital x
Motor Vehicle x Add: Net Profit x
Furniture x xx
xx Less: Drawings (x)
xx
Current Assets
Stock x Long-term
Liabilities
Trade Debtors x Bank Loan x
Prepaid Rent x Mortgage x
Bank x xx
Cash x Current Liabilities
xx Trade Creditors x
Accrued Wages x
Bank overdraft x
xx
xxx xxx
Name of Firm Balance Sheet as at date .
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Draw up final accounts and Balance Sheet from a Trial Balance Dr Trading & Profit and Loss Accounts for year ended 30.4.07 Cr
Capital 28,000 Bank overdraft 22,000 Motor vehicle 6,000 Opening stock 2,000 Sales 23,700
Purchases 26,000 Returns inwards 480 Returns outwards 900 Wages 4,000
Premises 45,000 Rent revenue 3,000
Trial Balance as at 30 April 2007
Dr Cr
Advertising 2,700
Creditors 11,000
Debtors 1,900
Closing stock $2,500
Balance Sheet as at 30 April 2007
Drawings 520
Sales 23,700
Capital 1 Mar 06 28,000 Fixed assets
Current assets
Current Liabilities Stock 2,500
Debtors 1,900
Premises 45,000 Motor vehicle 6,000
Owner’s Equity
Less Net Loss 5,080
Less Returns Inwards 480
Opening stock 2,000 Purchases 26,000
Less Returns Out 900 25,100
Cost of goods avail. for sale 27,100 Less Closing stock 2,500
$ $
$ $
Cost of goods sold 24,600
24,600 24,600
Net sales 23,220 Gross Loss 1,380
Gross Loss 1,380 Wages 4,000
Rent revenue 3,000
Advertising 2,700 Net Loss 5,080
8,080 8,080
$ $ $
Less Drawings 520
Creditors 11,000
$
B.Overdraft 22,000
Each item in the Trial Balance is listed in one of the 3 financial statements except for closing stock (which is outside the Trial Balance) is listed in two of the statements.
88,600 88,600 51,000
4,400
55,400
22,400
55,400 33,000 Mr Kong 28
The End, Questions?
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