THE BALANCE SHEET
Also called ‘Statement of Financial
Position
Before looking at the Balance Sheet for
Businesses we will recap at similar ideas for
individuals
Create definitions of the following terms:1. Assets
2. Liabilities
Learning Outcomes
• Describe the parts of the Balance Sheet.
• Explain two problems highlighted in
Balance Sheet.
This is Dave
He owns a house worth $1.2 million.
Class discussion: Is Dave a millionaire?
Dave has a mortgage of $500,000
Question: How much of the house does
Dave actually own?
Ownership of
Dave's House
Equity
(Dave)
58%
Mortgage
(bank)
42%
Group Discussion: What does the following picture show?
Commonly defined as all that you own
less all that you owe.
Equity can also be called Capital or Net Assets.
Equity is a similar concept to Net Worth – but
applied to businesses not people
Copy the Blue Notes
Equity = Assets minus liabilities.
This is Julie
Julie Barker’s Assets and
Liabilities as at 30 June 2015
Household appliances
Loan from mum (due next
week)
Jewellery
Mortgage (due 2025)
Farmers store card account
Furniture
Bank Account
Credit card debt (due end of
month)
Food in cupboard
Hire purchase on car (due 2018)
House
Car
Net Assets
$
4,000
(A-L)
500
6,900
106,000
3,000
18,000
1,100
1,300
3,300
19,000
165,000
27,000
Liabilities
Assets
Current
Non
Current
Current
Non
Current
Copy the Diagram
Activity Classify the list as either Assets
or Liabilities
What a business (or person) owns
These are called assets E.g. ?
Two types:• Current – Will be owned for less than a year
• Non Current – will be owned for more than a year. E.g. Fixed
Assets
Most businesses (and people) owe money or services to other
people or institutions such as banks
These are called liabilities E.g. ?
Two Types:• Current – Must be paid in the next year
• or Non Current – Will be paid in full in more than a year.
Copy the Blue Notes
Assets and Liabilities
The accounting equation is now stated as:-
Current Assets
&
Non Current Assets
Current Liabilities
&
Non Current
Liabilities
Copy the Blue Notes
Working Capital
Current Assets less Current Liabilities.
The “cash” available for
operations. It's used to pay bills.
day-to-day
Activity: Imagine Julie was a business Calculate her Working Capital.
Is this situation a problem?
Cash Flow Problem - When a business/
person does not have enough current assets to
meet their current liabilities.
Working Capital is low or even negative.
Activity: Solving Cash Flow Problems –
Activity Sheet.
Balance Sheet: To
measure assets, liabilities
at a point in time
(Business Name)
Balance Sheet as at 31 March 2…
$
Current assets
xx
(list)
xx
Non-current assets
xx
(list)
xx
Total assets
Less Liabilities
Current liabilities
(list)
Non-current liabilities
(list)
$
xx
xx
xx
xx
xx
xx
xx
xx
xx
Total liabilities
Net assets
A-L
Equity
A-L
John Bite, owner of a music retail
store called Dig Music, has recorded
the items below for the year ending
December 31, 2020.
Item
Inventory
Vehicles
Shop Premises
Mortgage
Creditors
Debtors
Long-term loan
Cash at Bank
($ 000s)
40
80
150
130
20
15
50
5
Activity: Produce the Balance
Sheet for December 2020 and
calculate the Owner’s Equity.
Analysis Questions:• Calculate John’s working
capital. Is it safe?
• Calculate the percentage of
the business that is owned by
John
Dig Music
Balance Sheet as at 31 December 2020
$ 000's
Current assets
Cash at Bank
5
Inventory
40
Accounts receivable (debtors)
15
Non-current assets
Vehicles
80
Shop Premises
150
Total assets
Less Liabilities
Current liabilities
Accounts payable (creditors)
Non-current liabilities
Long-term loan
Mortgage
Total liabilities
Net assets
Equity
$ 000's
60
230
290
20
20
50
130
180
200
90
90
Dig Music
Balance Sheet
High Gearing – A problem
Gearing measures the proportion of a firm's assets
are funded by owner's funds versus liabilities.
If the proportion is high (Above 50%) – it is termed
high gearing. This is considered risky.
Equity
31%
Total
liabilities
69%
Activity - Over two thirds of
Dig records has been funded
by liabilities – is this a
problem?
A business with high gearing is more vulnerable to a
decrease in sales because the company must
continue to:• Pay Interest on its debts and
• Repay its debts even though limited revenue is
coming in.
A greater proportion of equity provides a cushion to
protect the business.
Solution to this problem
1. Owner invests more funds to repay liabilities –
this will increase equity.
2. Stop taking profits out of the business – This will
mean assets can be funded by business cash
rather than liabilities .
Learning Review Activity – What have you
learned?
• What are the five main parts of a balance
sheet?
•
Which two problems highlighted in Balance
Sheet?
•
Give two solutions to each problem?