3.4 Balance Sheet
Balance sheets
We have explored one final account thus far and now we move on to the second one that you are required to learn about. The Balance Sheet is best known as asnap shot of the accounts of the business, because it reflects the position of the company at a particular point in time. It is similar to a photograph of the financial status of a business.
The Balance Sheet reflects information on three elements of the Business Organization.
1) Assets
These are resources that the business owns and that can be used towards created additional productive activity. These are usually classified as current assets and fixed assets. Current assets, such as raw materials and cash are the resources that are used towards production within the year. Fixed assets, such as machines, buildings, desks and chairs are used repeatedly and also help in the production process.
Classes of Assets Investopedia
Current Assets
Cash in bank
Cash on hand
Accounts receivable
Supplies
Inventory
Short term/liquid investments
Fixed Assets
Land, Buildings
Equipment, machinery
Technology (computers etc)
Furniture
Intangible assets (Patents, intellectual property, goodwill)
2) Liabilities
These are the debts or obligations of the business. What is owed to other entities are used to created productive activity and must eventually be repaid. The repayment is either within the year, current liabilities, such as a bank overdraft or short-term loan or long term liabilities, such as a mortgage or a long-term loan that is not due within the year.
3) Owners Equity
Also known as share capital, this is what has been provided by the owners of the business in the form of initial start-up capital. Owners equity will also reflect the reserves of the business profit that has been retained.
The above information on the Assets, Liabilities and Owners Equity can be shown via two methods. Account Format and the Report Format. You will learn both formats but should be aware that in the even that a balance sheet is provided in the examination it will be in the Report Format.
Before we look at the format in which to structure the financial sheet, you will need to fully understand all its contents and how they are reported.
The Balance Sheet is a financial sheet that, as the name suggests, balances with the calculation of various parts. This is because of the double entry accounting approach used to make adjustments in order that
Assets = Liabilities + Owners Equity
Students of the IB Diploma do not need to be familiar with double entry accounting or with the accounting cycles accruals, deferrals and adjustment of entries. Journal entry and T-accounting are also not a part of the IB Syllabus. However, there is the expectation that students will be familiar enough with the entries that they are able to reconstruct the financial sheets in given exercises.
Once we are familiar with the entries, positioning them in their proper order will be followed by simple mathematical calculations of addition and subtraction. Therefore the task lies in being familiar with the structures and intimate with the entries.
https://slideplayer.com/slide/8123316/ Ford's Cash Flow 2008 - Page 37
The Report Format
To correctly construct the balance sheet in the report format the following steps need to be followed.
1. The fixed assets need to be identified, itemized and summed up.
2. The current assets in turn need to be identified and summed up.
3. Note the current liabilities and summed them up.
4. The value for the net current assets is the determined by subtracting the current liabilities from the current assets (50,000 – 20,000 = 30,000)
5. The total assets less current liabilities are determined by adding all the fixed assets and current assets and then subtracting the current liabilities (200,000 + 50,000 = 250,000 - 20,000 = 230,000)
6. Determine the Capital Employed by adding the long term share capital, loans, and retained profit (50,000 + 80,000+ 100,000 = 230,000)
The Total Assets Less current liabilities will be equal to the Capital Employed.
The Account Format
In this format, the balance sheet assumes that the Assets are always to the left of the sheet and the Liabilities and equity to the right.
Therefore the total claims of the owners and debtors will equal the value of all the assets.
The account format will not be in IB