The Balance Sheet

The Balance Sheet is a list of the balances remaining on the Trial Balance after the Profit & Loss account has been done. The balances are arranged according to whether they are asset balances or liability or capital balances and gives the business's financial position at any given point in time. The Balance sheet is normally described "as at". It is a snapshot at one particular point in time.

The balance sheet can be prepared in two formats:

Vertically, emphasising Assets - Liabilities = Capital

or

Horizontally, emphasising Assets = Capital + Liabilities

For the purposes of this exercise we will be using the vertical format, as this is most widely used in all types of businesses and its form of presentation makes comparisons with other years easier.

To re-cap:

ASSETS - There are two types of assets:

Fixed assets are the more or less permanent assets of the business. They are not normally for resale, e.g. premises, motor vehicles, fixtures and fittings, equipment and furniture.

Current assets are the types of assets used for trading purposes. These assets are usually more liquid than the fixes assets. In other words they are more readily converted into cash. They include cash, bank, debtors and inventory.

LIABILITIES - There are two main types of liabilities:

Long term liabilities and are the creditors payable after 12 months. They include mortgages, loans, hire purchase repayments longer than 12 months and debentures.

Current liabilities represent the debts of the business which have to be paid in less than 12 months. These include trade creditors, bank overdrafts, and short-termloans that are repayable within 12 months.

CAPITAL

Capital represents what is known as "the net worth" of the owner(s). It is the difference between the assets and the liabilities. In the Balance Sheet it is listed under the "Financed By:" section. It includes capital introduced into the business, (which could be personally from the owners if a sole trader or partnership, or from the shareholders if a limited company), the net profit for the accounting period, less any owners drwings.

Now lets look at completing Pepe's Balance sheet