balance sheets


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Balance sheets
A balance sheet is a statement of a firm's assets, liabilities and owners' equity at a specific
date (i.e. it is a "snapshot" of the financial strength of a business at a particular moment in
It summarises the financial state of the business at that date. When added together, the liabilities and
owners' equity represent the sources of capital (i.e. it tells us where the money came from) and the
assets represent the uses of the capital (i.e. it tells us how the money was spent).
The two sides of the account must always balance, since every penny raised as capital must have
been used for some purpose and must be accounted for.
An asset is an item that will give present or future monetary benefits to a business as a result of
economic events. Therefore, an asset is basically an item or money that the business owns.
There are two main types of classification of assets fixed assets and current assets.
a) A fixed asset
b) A current asset
Fixed Assets
A fixed asset is acquired for the purpose of use in the business and is likely to be used by the
business for a considerable period of time (more than 12 months).
There are three categories of fixed assets:
a) Tangible fixed assets (physical items such as land, buildings, machinery, and vehicles, the
purchase of which is known as 'capital expenditure').
b) Intangible fixed assets (nonphysical items, which are very difficult to place a value on, such as
brand names, goodwill and patents).
c) Financial fixed assets (investments that the business has, such as shares and debentures in other
Current Assets
A current asset is either part of the operating cycle of the enterprise or is likely to be realised in the
form of cash within 12 months.
There are five categories of current assets:

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Cash in the bank.
b) Cash on the premises ("petty cash").
c) Debtors (customers who have purchased goods on credit, and have not yet paid).
d) Stock (raw materials, workinprogress and unsold finished goods).
e) Prepayments (where the business has paid in advance for the use of an item, rent for example).
A liability is the amount outstanding at the balance sheet date, which the business is under
obligation to pay.…read more

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Shareholders funds
There are several other items that appear on a Balance Sheet most notably shareholders' funds
(also called 'owners equity') and reserves.
These items show us where the business got its original capital from (i.e. the money it used to
startup), how much money the shareholders have a claim on within the business and what the
business has done with any retained profits over the years.…read more

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Share Capital 250
Reserves 190
Capital Employed 640 [200 + 250 + 190]
ASSETS EMPLOYED = CAPITAL EMPLOYED: the two parts MUST always balance.
Remember, a balance sheet shows what a company owns (assets), what it owes (liabilities) and
where the company got its money (capital) from at a specific point in time.
One of the most important parts of a balance sheet is the 'net current assets' section. This is the
daytoday finance that is needed for running a business.…read more


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