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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 Mr Kong 1
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Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

Mar 10, 2018

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Page 1: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 2: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 3: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 4: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 5: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 7: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 8: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

Bank loan and bank overdraft Mortgage

LIABILITIES OF BUSINESS

Unpaid bills

Creditors

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Page 9: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 10: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 11: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

How does a business measure its working capital ?

Working capital

= Current assets – Current liabilities

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Page 12: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 13: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 14: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 15: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 16: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

Capital Owned

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Page 17: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 18: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 19: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

Capital Employed

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Page 20: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 21: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 22: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

Building

ASSETS LIABILITIES

BALANCE SHEET

Equipment

Debtors

Stock

Cash

Capital

Loans

Creditors

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Page 23: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 24: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 25: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 26: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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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Page 27: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

$ $ $ $

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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Page 28: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

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

Page 29: Chapter 6 Balance Sheet - WordPress.com 6 – Balance Sheet ... Define Balance Sheet Understand the components of the balance sheet ... classification is according to when they are

The End, Questions?

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