business -finance

Balance Sheets

This is a financial snapshot of a firm on a particular day.  It displays the assets and liabilities of the company and shows how capital has been raised and used.

A simplified balance sheet will look as follows:

£

Long-term (fixed) assets

600,000

Short-term (current) assets

200,000

Assets employed

800,000

Total capital employed

800,000

Long-term assets can include:

Tangible assets

• Land and buildings
• Machinery and equipment
• Vehicles

Intangible assets

• Goodwill
• Patents and copyrights

Current assets (stock, debtors and cash) are treated differently from fixed assets as they can change on a daily basis.  Current liabilities are deducted from the current assets to give net current assets (also known as working capital).

Firms will receive their capital from one of three main sources:

• Banks in the form of loan capital – in addition to the loan interest will have to be paid
• Shareholders in the form of share capital – individuals can buy shares in the company and in return they may receive a dividend
• Reserves which are known as reinvested profits – the company ploughs profits previously earned back into the business in the hope of achieving greater profits in the future

Share capital and reserves are both owed to the shareholders but they do not have to be repaid, therefore they are treated differently from loan capital which has to be repaid to the bank.  It is now possible to add greater detail to the balance sheet shown earlier:

£

£

Property

360,000

Machinery and vehicles

240,000

600,000

Stock

160,000

Debtors and cash

120,000

Current liabilities

(80,000)

Net current assets

200,000

Assets employed

800,000

Loan capital

500,000

500,000

Share capital

100,000

Reserves

200,000

300,000

Total capital employed

800,000