Time Tracer Ltd - Publishing

ACCOUNTING INSIGHT

2nd Edition by Edwin Olima FCCA

ISBN 0-9543820-1-3

 

 

 

 

 

 

 

 

 

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Chapter 14           Assets Less Liabilities 

(The Balance Sheet )

 

Anyone and any business will have at any given time a set of assets and a set of liabilities. The listing of the values of these assets and liabilities  on a given date comprise The Balance Sheet . The balance sheet thus shows the net worth of the business.

 

Exercise: Using the final trial balance  in Chapter 12 , enter the relevant balances in the balance sheet below. A few have been done for you. Totals have been left in to help you check your entries as you go along.

The Company Limited

Balance Sheet  As At 31st December 3000

 

 

3000

 

Reference:

£’s

£’s

£’s

Fixed Assets

 

 

 

 

                Van Cost

 

 

 

3,000

                Van Depreciation Accumulated

 

 

 

(750)

 

 

 

 

2,250

Current Assets

 

 

 

 

                Stock

 

1,500

 

 

                Trade Debtors

 

 

 

 

                Prepayments

 

 

 

 

                Cash At Bank

 

 

 

 

 

 

 

12,863

 

Current Liabilities

(due within 1 year of the balance sheet date)

 

 

 

 

                Trade Creditors

 

5,909

 

 

                Corporation Tax

 

 

 

 

                VAT

 

 

 

 

                PAYE  & NIC

 

 

 

 

                Net Pay due to employee

 

 

 

 

                Accruals

 

 

 

 

 

 

 

(              )

 

 

 

 

 

 

Net Current Assets / (Liabilities)

 

 

 

3,243

 

 

 

 

 

Long Term Liabilities

(due after 1 or more years of the balance sheet date)

 

 

 

 

-

  

 

 

 

 

Net Assets / (Liabilities)

 

 

 

5,493

 

 

 

 

 

Share Capital & Reserves

(Amount owed to the owners of the business=Equity)

 

 

 

                Ordinary Share Capital

 

 

100

                Profit And Loss Account – Balance B/F

 

 

--

                                                    – Retained this year

 

 

 

Total Equity

 

 

 

 

Compare your answer with the one in the answer section at the back of the book. Note that the value of net assets should equal the value of total equity (amount owned by and owed to the shareholders/owners of the business). When you have referenced your working papers (See APPENDIX C ), you can enter your references in the reference column above to show where the figures come from.

 

Given strict statutory requirements for limited companies the profit and loss  account and the balance sheet have to follow a set format. Your accountant will be able to help you produce these financial accounts according to the relevant laws of the country and industry within which your business operates.

 

REASONS FOR PRODUCING FINANCIAL ACCOUNTS  

 

The Profit and Loss account

 

The profit and loss  account shows how much profit has been made by the business over a given period of time and details the income and expenses  giving rise to that profit. It can be used for the following purposes:

·         It can help identify areas where costs are too high and need to be controlled and also where income is increasing and requires more investment.

·         The net income shown by the profit and loss  account can be used to justify further funds to expand the business in the form of issues of share capital  or loans from a bank.

·         It can be used to compare performance with other companies in the same industry.

·         Taxation authorities need the profit and loss  account to verify that the business is paying its due share of taxation on profits.

·         Government  regulations now require corporations to file annual accounts in the interest of the public.

·         If one decides to sell on the business to another entrepreneur then by looking at the net income flows over the past years one can get an indication of future income flows and thus get a fair price for the sale of the business.

 

The Balance Sheet

The balance sheet shows the wealth of a business on a given date and it is useful for the following purposes:

·         The net assets on the balance sheet can be used to support a bid for further funds to expand the business either by the issues of share capital  or via loans from a bank.

·         A number of ratios can be extracted from the balance sheet and the profit and loss  account which can then be compared over time and with other similar businesses to determine if financial performance and health is good (See APPENDIX D ).

·         Government  regulations now require corporations to file annual accounts that include a balance sheet in the interest of the public.

·         If one decides to sell the business to another entrepreneur then by looking at the net asset value of the business (together with other information) on the sale date and over previous dates one can get a fair price for the sale of the business.

 

 

DEFINITIONS OF TERMS USED IN FINANCIAL ACCOUNTS

By doing the exercises in this book and from your general experience you will have gained a feel for the meaning of the terms used in Financial Accounts.

 

Since profits and wealth are serious financial issues, The Accounting Standards Board (ASB)  in the United Kingdom in its Statement of principles for financial reporting, has the defined elements of Financial Accounts below (reproduced with the kind permission of the ASB). See if the definitions agree with your experience. In italics are examples from The Company Ltd:

 

Assets

Assets are rights or other access to future economic benefits controlled by an entity as a result of past transactions or events.

Examples from The Company Ltd: The van, the bank account balance, trade debtors.

 

Liabilities

Liabilities are obligations of an entity to transfer economic benefits as a result of past transactions or events.

Examples from The Company Ltd: Trade Creditors, Corporation Tax.

 

Ownership interest

Ownership interest is the residual amount found by deducting all of the entity’s liabilities from all the of the entity’s assets.

Examples from The Company Ltd: Total Equity, that is, share capital and retained profits.

 

Gains

Are increases in ownership interest not resulting from contributions from owners.

Examples from The Company Ltd: Income like sales and bank interest received.

 

Losses

Are decreases in ownership interest not resulting from distributions to owners.

Examples from The Company Ltd: Expenses like cost of goods sold, salaries, rent etc.

 

Contributions

Contributions from owners are increases in ownership interest resulting from transfers from owners in their capacity as owners.

Example from The Company Ltd: Share capital of £100.00 banked in the company.

 

Distributions

Distributions to owners are decreases in ownership interest resulting from transfers to owners in their capacity as owners. 

Example from The Company Ltd: drawings (or dividends) of £900.00.

 

The examples taken from The Company Ltd are some of the most common types of elements of financial statements.

 

The terms and definitions used by the ASB are probably not what your normal usage would be, however given the sometimes complex nature of businesses and transactions, the terms and definitions above ensure that even these complex business situations/transactions are accounted for.


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