Accounts Balance sheet 1. Learning Outcomes 2 Balance sheet Balance Sheet: Shows what a firm owns, what it owes and the value of the capital invested.

Accounts

Balance sheet

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Learning Outcomes

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Balance sheet

• Balance Sheet: Shows what a firm owns, what it owes and the value of the capital invested in the business at a point in time

• i.e. A statement of a firm’s value on a certain date

• Constituents:– Assets– Liabilities– Capital

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Balance sheetassets

• Assets: What the business owns:– Fixed assets: Assets that will be held for

more than one year– Current assets: Held for less than one year– Trade debtors: Customers who have bought

goods on credit and owe money

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Balance sheetliabilities

• Liabilities: What the business owes– Current liabilities: Due to be paid in less

than one year– Trade creditors: Suppliers to whom the

business owes money– Long-term liabilities: Due to be paid in more

than one year

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Balance sheetcapital

• Capital: What the business owes its owners• Share capital: Invested in the business by its

shareholders• Retained profit: Profit that has been

accumulated over previous years

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Balance sheetthe accounting equation

• The balance sheet is based around the principle that:

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Shareholders’ funds(capital)Assets Liabilities =–

Balance sheetexample

• I start up in business with:– £100 of share capital – a £50 long term loan

• I buy:– a building for £90– a van for £20 – £30 of stock, for which

I pay cash of £10 and have a month’s credit for the remainder

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£100

£100

£150

£150

(100 + 50)(100 + 50 - 90)(100 + 50 - 90 - 20)(100 + 50 - 90 - 20 - 10)

Fixed Assets:BuildingsVan

Current Assets:StockCash

Less: Current liabilities:Trade creditors

Net Current AssetsAssets employed

Financed by:Share capitalBank loan

Capital employed

£

Balance sheet

Tesco plc balance sheet

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Tesco plc balance sheetat 25 February 2008

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Fixed assetsLand and buildings 16,930Equipment and vehicles 2,857

Intangible assets

23,864Current assets

Stocks 2,430Debtors 1,311Cash

Less: Current liabilitiesCreditors 7,277Bank overdraft 10,263

Net Current Liabilities (3,963)

Assets Employed

Financed by:Share capital 4,904Retained profit 6,998Bank loans

Capital Employed

£’000 £’000 £’000

4,077

2,559 6,300

2,986

19,901

7,999

19,901

Balance sheettask – Tesco plc balance sheet

• What sort of fixed assets do Tesco have?• Who might be their creditors?• Who might be their debtors?

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Balance sheetTOP TIP (1)

• A balance sheet must always balance– If it doesn’t, there’s a mistake

• The balance sheet lists assets in reverse order of liquidity– Fixed assets first (freehold land is the least

liquid asset)– Current assets last (cash is the most liquid

asset)• Net current assets

= Current assets – Current liabilities= Also called working capital– Positive working capital is important for good

cashflow

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Balance sheetTOP TIP (2)

• The top half of the balance sheet shows where the capital invested in the business is currently spent (assets employed)

• The bottom half of the balance sheet shows the long term sources of funds for the business (capital employed)

• As the business grows, retained profit is added to the capital employed– It is part of the capital as it ultimately belongs

to the shareholders

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Balance sheet

Capital and Revenue expenditure

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Capital and revenue expenditure

• Capital expenditure: Spending on new fixed assets

• Revenue expenditure: Expenditure on all other costs

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Capital and revenue expenditureshort task

• For each of the items of expenditure below, indicate whether it is capital or revenue expenditure:

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Capital expenditure

Revenue expenditure

Advertising

MachineryRaw materialsPowerComputersOffice salariesSecond-hand ferryTelephone bill

Balance sheet

Summary questions

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Balance sheetssummary questions (1)

• For each of the questions below, indicate where the answer can be found:

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What was the gross profit?

What dividends did we pay shareholders?

What is the total value of current assets?

Trading and Profit & Loss Account

Appropriation Account

Balance Sheet

Balance sheetssummary questions (2)

• For each of the questions below, indicate where the answer can be found:

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What expenses did we incur last year?

What was our net profit?

What is our capital employed?

Trading and Profit & Loss Account

Appropriation Account

Balance Sheet

Balance sheet

Task – Ollie’s Fine Foods Ltd

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TaskOllie’s Fine Foods Ltd

• The following balance sheet (next slide) is for Ollie’s Fine Foods Ltd, a retailer of locally grown organic foods

• The figures are for 2005 (shortened balance sheet)

• Questions– In what way is the balance sheet shortened?– State two likely fixed assets that Ollie, as an organic food

retailer, might have– Use the following figures to create an extract of the balance

sheet at 31 July 2006• Fixed assets: £139,000• Stock: £4,700• Debtors: £19,000• Cash: £2,100• Creditors: £18,700• Overdraft: £3,400

– Use the balance sheets to compare Ollie’s Fine Foods Ltd’s performance

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Ollie’s Fine Foods Ltdbalance sheets as at 31 July

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2005 2006

£’000 £’000 £’000 £’000

Fixed assets 142,500

Current assets

Stock 5,400

Debtors 14,600

Cash 6,300

26,300

Current liabilities

Creditors 11,200

Overdraft 1,100

(12,300)

Net current assets 14,000

Net assets employed 156,500

QUIZ 1

QUIZ 2

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