Business Studies - Section Eight - The balance sheet - Net assets

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The balance sheet - Net assets

The balance sheet is quite tricky - but the basic idea is pretty simple. It records where the business got its money from, and what it has done with it. The two balance out exactly - hence the name. 
It is calculated at a particular date - usually the last day of the financial year. 

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Fixed Assets will last for more than one year

1) The business has used some money to buy fixed assets - premises, machinery, vehicles.
2) This figure is what they're worth on the date of the balance sheet - they'll have depreciated since they were bought, but that's all taken care of in the profit and loss account. 

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Current assets last a few months

These are listen in increasing order of liquidity:
1) Stock is the least liquid. It includes raw materials and finished products that the firm has spent its money on but which have not yet been sold.
2) Debtors refers to the value of products sold - usually on credit - that have not yet been paid for by the customers. What's happening here is that the firm is lending its money to customers so they can buy its products.
3) Cash is the most liquid. This is money the firm hasn't spent on anything yet - its just sitting in the bank. 

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Current liabilities are bills the firm has to pay

1) These are any payments the firm will have to make within one year of the date on the balance sheet. Creditors is the opposite of debtors - it is money the firm owes to its suppliers. Also included is any unpaid corporation tax - payable to the government out of the previous year's profits - as well as any unpaid dividends to shareholders.
2) This is money which doesn't really belong to the firm, since it's going to have to pay it to someone else pretty soon. So you take this away from the current assets figure... 

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Current assets - Current liabilities = Net current

1) The net current assets figure is what you get when you subtract those current liabilities from the current assets. It's also called working capital.
2) Add the net current assets to the fixed assets and you get the net assets, or net worth, of the business. This is the amount the firm would make if it sold all its assets (in theory) - it's what the firm is worth. 

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