The balance sheet

At the end of an accounting period, all assets and liabilities are listed from individual accounts on to the trial balance and then added up together, with like items grouped together. There are two ways of showing assets and liabilities on a balance sheet – using either a horizontal format or a vertical format . A horizontal format lists all the assets on the left-hand side and all the liabilities on the right. As a result of the manner in which transactions are recorded using double-entry bookkeeping, the total of assets always equals the total of liabilities. This is why a statement of financial position is commonly called a ‘balance sheet’, that is, both sides (or halves) add up to the same amount. A vertical format often shows capital in the ‘bottom’ half, and in the ‘top’ half shows assets with liabilities deducted from them (current liabilities, for example, are deducted from current assets to show net current assets or liabilities). This is often referred to as the net assets approach . It is also possible to show all assets in the top half and all liability (or credit) balances in the bottom half (which is now possible under the international accounting approach ) Any entity could, in theory, produce a balance sheet in either format, as it is just a matter of presentation. The vertical balance sheet (i.e., using the net assets approach) is common in the UK, but different countries have different rules. It would not, for example, be permitted in France, although other countries with specific regulations may require it for certain types of entities. Mr Schmidt – Balance sheet as at 31 March 2010 £ £ Non-current assets Capital Fixtures and fittings 18,000 Cash introduced 25,000 Retained earnings 11,000 Current assets Net profit for the year 9,400 Inventory 12,000 Trade receivables 5,800 Current liabilities Cash at bank and in hand 2,300 Trade payables 8,200 Drawings Total15,500 Total53,600 Total53,600 Figure 4 Example of a horizontal balance sheet Mr Schmidt – Balance sheet as at 31 March 2010 £ £ Non-current assets Fixtures and fittings 18,000 Current assets Inventory 12,000 Trade receivables 5,800 Cash at bank and in hand Total2,300 20,100 Current liabilities Trade payables Total(8,200) Net current assets Total11,900 Net assets Total29,900 Capital Cash introduced 25,000 Retained earnings Total11,000 36,000 Add: Net profit for the year Total9,400 45,400 Less: Drawings Total(15,500) Total29,900 a mashine for manufacturing widge is assest. air conditioning used in factory is a cost and expences. This is a cost/expense – a utility needed to keep machinery and employees at an appropriate temperature while they work. If the actual air conditioning plant itself is implied by the words ‘air conditioning’ (rather than what the plant actually does) then this would be a tangible non-current asset, likely to be used and kept for a long time. sales of 1,000 widgets for cash to Mr Mohammad, a customer income a sale to a customer, generating sales revenue (income). £3,000 borrowed from the bank-This is a loan, which will have to be paid back. It is a liability, and whether it is classified as current or long-term will depend on the date of repayment. a heap of metal on the yard, to be used for manufacturing widgets-asset his is raw material to be used in manufacturing so is inventory. Hence, it is a current asset. £4,000 owed to Pyron Ltd for the metal on the yard-libility This is money owed for material to be used in the business, so it represents a trade payable, and would be a current liability. a Toyota Lexus car, used by an employee, but owned by his/her employer, Yen Ltd- asset This is a non-current asset. This is because it is used in the business for transporting the employees (it may be what is called a ‘pool’ car, that is, it is available to a variety of employees). It is important to note that the car is owned by the employee’s company, not the employee. Therefore, the car would be one of the company’s non-current assets. £10,000 of personal savings used by someone starting up a business-liability This is money introduced to do business – therefore, it is capital which may be regarded as a particular type of liability, in that it will eventually be repayable to the owner.