Lesson ObjectiveTo be able to prepare the Profit

and Loss and Balance Sheet Statements

Balance SheetWhat is a Balance Sheet?Balance sheet is statement that summarises the

assets, liability and owners equity for a particular period of time

What are the components of a Balance Sheet?● Current Assets ● Current Liabilities● Working Capital● Reserves ● Owners Equity

Current Asset Vs. Current Liabilities

Current Asset:This refers to all the asset owned by the business for the relevant period of time. They are the resources of the business that have future economic value and that can be measured and valued in monetary terms. Current Asset includes cost or expenses paid in advance and not yet expired. Examples include prepaid rent, prepaid insurance etc. Current asset can either be tangible or intangible asset.

Example of current asset includes:● Stock (materials & Finished goods/Output)● Debtors● Investment● Plant and machineries● Furniture and motor vehicles● Cash and bank balance● Prepaid Expenses etc.

Contd.

Current Liabilities:

This refers to all the liabilities owed by the business to other businesses for the relevant period of time. This include:

● The bank loans obtained, ● The overdraft,● The rent owed or ● The insurance owed.

Working Capital/LiquidityBasically, working Capital is the difference between the current asset and the current liabilities. It refers to the day to day money available for the running of the business. it is used to determine the liquidity of the business; that is whether the business is able to pay up its debt. It is also referred to as a liquid asset because the business has the ability to convert its asset to cash in order to pay up its debts or bills. That is:

Working Capital = Current asset - Current Liabilities.

Relevance of the working capital to business:

● it is used to determine the volume of cash flow base of a business● it puts the business in a position to pay up its bills● it enables a business to negotiate long period for payment● it can be used to determine the ability of the business to borrow● it increase the ability of the business to pay expenses and short-term debts

Group Activity

Calculate the working capital for each business What recommendation would you make for each business?

Tesco Plc £

Morrison Plc £

Bank 200

Creditors 400

Loan 2000

Debtors 750

Stock 600

Cash 300

500

200

750

300

1000

250

Provision of Appropriate Reserves

● Reserves refers to the value of money set aside by the business in order to cater for emergencies or unforeseen contingencies. in order words, where a business has a problem as a result of economic recession or natural disaster, reserves will aid the business to cover its immediate expenses and continue in business.

● Some analysts recommend that reserves should be maintained which will allow the business to continue for at least three months in the event of an emergency

● It has also been suggested that a business should make provision for reserve when preparing a budget for the period because it may be very difficult to control budget to cost and because of so many economic and social factor. Hence, the need to make provision for a reserve.

Format of a Balance Sheet statement

Fixed Asset:Plant & mach xxFurniture xxBuilding xx

Current Asset:Debtors xxStock xxCash/bank xxPrepaid Expenses xx

Liabilities:Creditors xxLoans xx

Owners’ EquityCapital xxReserves/Retained Ern xx

Total Asset xxx Total Equity xxx

Uses & Purposes of the Balance SheetUses● It is used for financial reporting and analysis● It consists of analytical tools and techniques

for obtaining relevant data and financial information

Purposes● It allows key decision maker to evaluate the

business● It enables the creditor to make decision about

the creditworthiness of the business.● It enables the investors to ascertain if it worth

investing in the business.

Question & Answer