A Fixed asset is an asset that has a life span of more than one year, e.g. machinery.
Fixed assets can be divided into: Tangible assets (physical assets), Intangible assets (non-physical attributes) and Financial assets (Investment/Shares).
Tangible assets – least liquid – cannot be turned into cash quickly.
Intangible assets – income generating – can result in money coming into business.
Financial assets – investment/shares – risk of losing, but can be turned into cash quickly
Current Assets are assets that will be changed into cash with one year, e.g. stock
Current Assets can be divided into: Stock, Work-in-Progress, Debtors, Cash in Hand and Cash at Bank.
Stock – Raw Materials and finished product
Work-in-progress – materials committed to the production process, e.g. incomplete products
Debtors – people who owe money
Cash in Hand – money held on business premises
Cash in Bank – cash in the business bank account.
Current Liabilities are the short-term debts of the firm.
They are all the liabilities that the business must repay within one year. These are recorded in the first part of a Balance Sheet.
Current Liabilities include: Trade creditors, overdrafts and Corporation Tax due
Long-term Liabilities are the debts of the business that will be repaid in a time period longer than a year.
These are recorded in the second part of a Balance Sheet.
The most common long-term liability is a loan.
The Balance Sheet
The Balance Sheet allows a business to consider the values for areas other than just revenue, costs or profits.
The balance sheet is only accurate for a specific date and shows what the business has been doing in the recent past. It highlights how their activities have been paid for, containing information on assets and liabilities.
The Balance Sheet is split into two sections - each will have the same final figure, a reflection of why it is called a Balance Sheet!
It shows all the assets a business has purchased and what finance it used to purchase them.
NET ASSETS = CAPITAL EMPLOYED
Capital employed is the way in which the Net Assets of the business are financed.
Capital employed can include:
- Capital - the money invested by the owners of the business
- Net Profit - figure calculated in the Profit & Loss Account
- Long-term Liabilities - money owed over one year, e.g. a loan
Working Capital is also known as Net Current Assets.
Total Current Assets - Current Liabilities = Working Capital/Net Current Assets
Net Assets = Total Fixed Assets - Working Capital (a.k.a. Net Current Assets)