Business Finance - Balance Sheets

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Emma Rudd BMA
Business Finance, Balance Sheets _
What is a Balance Sheet? ­ Text Book
A balance sheet is a financial statement recording the assets (possessions) and
liabilities (debts) of a business on a particular day at the end of an accounting period.
The balance sheet only represents a picture of the businesses assets and liabilities at a
moment in time; it is commonly described as a `snapshot' of the financial position of an
organisation. Because of this balance sheets always carry a date on which the validation
of assets and assessment of liabilities took place.
Key Balance Sheet Relationships
This is the fundamental relationship that explains why balance sheets balance.
Businesses need to invest in a range of assets if they are to operate efficiently.
By recording assets and liabilities the balance sheet sets out the ways in which the
business has raised its capital and the uses to which this capital has been put. The
balance sheet provides a great deal of information for those with an interest in a
business and is the primary financial document published in businesses.
Balance sheets are an essential source of information for a variety of business decisions
and for a number of stakeholders.
Shareholders (and potential shareholders) may use balance sheets to assess a
business potential to generate profits in the future. Thus, they may examine the
extent and type of assets such as machinery and property may signify a potential
for profit, depending upon the type of business.
Suppliers are more likely to use a balance sheet to investigate the short-term
position of the company. Thus they may consider cash and other liquid assets a
business holds and make a judgment about whether the business is likely to be
able to pay its bills over the coming months. This may help a supplier reach a
decision on whether to offer credit to the business in question.
Managers will be interested in the balance sheet as an indication of the
performance of the business. Thus they may extract information to help them
reach a decision on how to raise further capital for future investment. The
amount of existing loans may be one factor influencing this decision.
The precise information drawn from the balance sheet will depend upon the stakeholder
and the nature of the enquiry. However it is important to appreciate that this particular
financial statement contains a great deal of information.
What represents a `good' balance sheet is difficult to determine. This will depend upon
the circumstances of the business. However in there are a number of key elements
within a balance sheet that are worth considering when using this document to assess
the financial position of a business.
An asset is simply something that a business owns. Thus assets are what a business uses
its capital to purchase. There are two main categories of assets that appear on the

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Emma Rudd BMA
balance sheet. The distinction between the two categories is based upon the time the
assets are held within the business.
1. Fixed Assets. These are the assets owned by a business that it expects to retain
for 1 year or more. Such assets are used regularly by a business and are not
brought for the purpose of resale. E.g. Land, property, equipment and vehicles.
2. Current Assets.…read more

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Emma Rudd BMA
However at the same time the business will have additional assets recorded on its
balance sheet (in this case vehicles initially valued at £575,000). Thus this
transaction will not cause the balance sheet to become unbalanced.
Alternatively the business might sell a fixed asset for cash. In this case the
business will have fixed assets of a lower value, but its holdings of cash will rise
by the same amount.…read more

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Emma Rudd BMA
The figure against which This figure is termed net Private limited companies
capital is balanced assets (which is total assets balance their capital
less all creditors whether against the net assets
due for payment within one employed figure and so
year or over a longer long term liabilities are
period) included as liabilities
rather than being
deducted from assets
prior to a balance being
made.…read more

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Emma Rudd BMA
then leasing them back. Many retailers have negotiated sale and leaseback deals
on their high street properties.
Businesses may maintain the value of intangible assets on the balance sheet at
what might be excessive levels to increase the overall value of the organisation.
This tactic is only possible when the assets in question (e.g. goodwill or brands)
have been purchased.
Capitalising expenditure.…read more

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Emma Rudd BMA
Intangible Assets
Intangible assets such as reputation and goodwill are very subjective, so in general they
are not shown on the balance sheet, although a brand name is a major asset it is not
recognised in such accounts. However a value will be calculated if there is a takeover if
the brand name is going to be a major asset.…read more


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