The 30 Day MBA by Colin Barrow Read Free Book Online

headings of which you can change or delete to meet your particular needs.
    The balance sheet
    A balance sheet is a snapshot picture at a moment in time. On the one hand it shows the value of assets (possessions) owned by the business and, on the other, it shows who provided the funds with which to finance those assets and to whom the business is ultimately liable.
    Assets are of two main types and are classified under the headings of either fixed assets or current assets. Fixed assets come in three forms. First, there are the hardware or physical things used by the business itself and which are not for sale to customers. Examples of fixed assets include buildings, plant, machinery, vehicles, furniture and fittings. Next come intangible fixed assets, such as goodwill, intellectual property etc, and these are also shown under the general heading ‘fixed assets’. Finally there are investments in other businesses. Other assets in the process of eventually being turned into cash from customers are called current assets, and include stocks, work in progress, money owed by customers and cash itself.
    Total assets = Fixed assets + Current assets
    Assets can only be bought with funds provided by the owners or borrowed from someone else, for example bankers or creditors. Owners provide funds by directly investing in the business (say, when they buy shares issued by the company) or indirectly by allowing the company to retain some of the profits in reserves. These sources of money are known collectively as liabilities.
    Total liabilities = Share capital and reserves + Borrowings and other creditors
    Borrowed capital can take the form of a long-term loan at a fixed rate of interest or a short-term loan, such as a bank overdraft, usually at a variable rate of interest. All short-term liabilities owed by a business and due forpayment within 12 months are referred to as creditors falling due within one year, and long-term indebtedness is called creditors falling due after one year.
    So far in our High Note example, the money spent on ‘capital’ items such as the $/£/€12,500 spent on a computer and fixtures and fittings have been ignored, as has the $/£/€9,108 worth of sheet music etc remaining in stock waiting to be sold and the $/£/€12,000 of money owed by customers who have yet to pay up. An assumption has to be made about where the cash deficit will be made up, and the most logical short-term source is a bank overdraft.
    For High Note at the end of September the balance sheet is set out in Table 1.8 .
    TABLE 1.8    High Note balance sheet at 30 September
$/£/€
$/£/€
Assets
Fixed assets
Fixtures, fitting, equipment
11,500
Computer
1,000
Total fixed assets

12,500
Working capital
Current assets
Stock
9,108
Debtors
12,000
Cash
0
21,108
Less current liabilities (creditors falling due within one year)
Overdraft
4,908
Creditors
0
4,908
Net current assets
[Working capital (CA-CL)]

16,200
Total assets less current liabilities

28,700
Less creditors falling due after one year
Long-term bank loan

10,000
Net total assets

18,700
Capital and reserves
Owner’s capital introduced
10,000
Profit retained (from P&L account)
8,700
Total capital and reserves

18,700
    Balance sheet structure
    The layout of the balance sheet using UK accounting rules is something of a jumble, with assets and liabilities intermingled. In the United States the balance sheet is traditionally set out horizontally, with the assets on one side and the liabilities and owner’s equity, the two sources of funds, on the other (see Table 1.9 ).
    TABLE 1.9    High Note balance sheet – US style
Assets

Liabilities and owner’s equity
Cash
0
Accounts payable
0
Accounts receivable (debtors)
12,000
Notes, short term (overdraft)
4,908
Inventory (stock)
9,108
Bank loans, long term
10,000
Fixed assets
12,500
Owner’s industrial capital (owner’s capital introduced)
10,000
Retained earnings (profit