CXC POA SECTION 2: THE CLASSIFIED BALANCE SHEET Notes

SECTION 2: THE CLASSIFIED BALANCE SHEET Students should be able to:  G ive examples of different types of assets and liabilities.  Use the Balance Sheet/Accounting equation.  E xplain the concept of a Balance Sheet.  Identify the components of a Balance Sheet.  C onstruct a simple Balance Sheet.  C onstruct classified Balance Sheets.  D etermine which items in a Balance Sheet will change as a result of various transactions.

Assets , Liabilities and Owners Equity (Capital) 

Assets - are things that a company owns and are sometimes referred to as the resources of the company.



Liabilities - are debts or obligations owed by one entity to another entity payable in money, goods, or services.



Capital/Owners Equity - money invested in a business by its owners (it is the owners' share of a business)

case study 1 Anna has $5000 she wants to open a shop buying and selling ice cream. ◦ She Purchased ice cream . Cups cones, napkins, spoons for her businesses valued $1000 paying with cash ◦ She Purchased a Refrigerator on credit from ABC LTD valued at $8000 Question - Can you identify her assets liabilities and owner's equity? 

She invested ( started with)$5000 in the businesses............. {Owners Equity/Capital}



She is opening an ice cream shop so the purchases of things she would later resell are what we call inventory or stock. {Assets( they are owned by the business) }



She then purchased a refrigerator for use in the business but it would be paid for at a later date  She now owns the refrigerator so it is an asset  She also owes ABC ltd for it so they are her liabilities

4. She has $4000 remaining from the amount she started with {5000 – 1000 = 4000 ( A cash balance of $4000)} Therefore  Assets (All the things that is owned by the business)  Inventory (stock) $1000  Refrigerator $8000  Cash $4000 

Liabilities [Creditor] (All the things owed by the business to an outside party) - ABC ltd $8000



Owners equity/ Capital (The money or other items brought into the business by the owner) The $5000 invested into the business bu the owner.

Accounts Payable (Creditors) - A person or company to whom money is owe to by the business, creditors are liabilities of the business. Accounts Receivable (Debtors)- A person or company that owes money to the business, debtors are Assets of the business . Inventory (Stock) -

Goods a businesses holds with the intention to resell

The Accounting Equation Is a mathematical expression used to describe the relationship between the assets, liabilities and owners equity of a business . The accounting equation states that Assets = Liabilities + Owners Equity Lets look again at Anna and her ice cream shop (Case study 1) Assets

– Inventory  Refrigerator  Cash Total assets

$1 000 $8 000 $4 000 $13 000

Liabilities [Creditor] ABC ltd

$8000

Owners equity/ Capital

$5000

Is this true for Anna's business ? Is her Assets = Liabilities + Owners Equity ? Assets $13 000

= =

Liabilities $8000

+ +

Owners Equity $5000

The Accounting Equation can also be written Capital = Assets – Liabilities {$5000 = $13 000 - $8000} Liabilities = Assets – Capital {$8000 = $13000 - $5000}

The Balance Sheet Is a statement of the financial position of a business, it shows the assets, liabilities and owner's equity as at a specific date(usually the end of its financial year). Components of the Balance Sheet As stated earlier we said that the balance sheet shows : The Asset  The Liabilities  Owners equity  As at a certain date The Classified Balance Sheet To group or place the items in the balance sheet into categories. Assets are grouped into fixed and current, liabilities would be grouped into long-term and current. For all our examples, the balance sheets are classified. The Assets There are two types of assets:1. Fixed assets 2. Current Assets Remembering that assets are things that a company owns and are sometimes referred to as the resources of the company. There are two types of assets, fixed and current.  Fixed Assets (or long tern assets) are all items owned by the business and is used in the day to day business function, fixed assets are not expected to be consumed or turned into cash in less than one year . Examples of fixed assets are Land, Building, Motor Vehicles, Equipment  Current Assets (or short term assets) are those items owned by the business and is used in the day to day business function, current assets are constantly flowing in and out of the business and is expected to be converted into cash within one year . Examples of current assets are Accounts receivables (debtors), Inventory, Cash (both in hand and in the bank)

The Liabilities There are two types of liabilities:1. Long-term liabilities 2. Current Assets Remembering that liabilities are debts or obligations owed by one entity to another entity payable in money, goods, or services. There are two types of liabilities Long -term liabilities and current liabilities  Long Term Liabilities are those obligations which become due and must be repaid in a period more than one year. Examples of Long-term liabilities are Long-term loans and Mortgage payable.  Current Liabilities are those obligations which become due and must be repaid within a year. Examples of current liabilities are Accounts Payable (creditors), Short-term loans, Bank overdrafts. The Heading The balance sheet must always be correctly headed, included in the heading is  The business name  The name of he statement :-Balance sheet  The date of the statement:-The balance sheet must be dated as at as certain date(the date would always be given) Balance sheet formats The balance sheet has two formats the vertical format and the horizontal format. We would prepare the horizontal format first. Classified Balance Sheet:- Vertical format The vertical format would be discussed in more detail in Section 5.

Classified Balance Sheet:- Horizontal Format This layout reflects the accounting equation which states that Assets = Capital + liabilities with the asset on the left and capital and liabilities on the right.

The Heading

Left hand side is called the Debit side, all assets are listed on this

Right hand side is called the Credit side all liabilities and capital are listed on this side

XYZ Limited Balance Sheet as at December 31 20##

debit side (Dr) Asset Fixed Assets Land and Buildings Office Furniture Computers

$

$

credit side (Cr) $ $

Capital and Liabilities Capital

124 000

100 000 50 000 25 000 175 000 Long-term liabilities Long term loans

Current Assets Debtors Inventory Cash in bank Cash in hand

10 000 5 000 2 000 500

Current liabilities Creditors bank overdraft short term loan

50 000

16 000 1 500 1 000

17500

192 500

18 500

Total of debit and credit must be equal

192 50

Lets look again at Anna's ice cream shop (Case study 1) we can prepare her balance sheet as at the start of her financial year January 1st 2014. Lets look again at Anna and her ice cream shop (Case study 1) Assets

– Inventory  Refrigerator  Cash Total assets

$1 000 $8 000 $4 000 $13 000

Liabilities [Creditor] ABC ltd Owners equity/ Capital –

$8000 $5000

Note :11 Heading with the name of the company, the name of the statement(balance sheet) , the date(as at date given in the question)

11 We would be starting with the debit (DR) side but you can start either side. On the debit side we are placing all the assets, do not list all assets , only list the ones given in the question. Anna's assets are: Inventory.....Current Asset  Equipment(Refrigerator).......Fixed Asset  Cash.........Current Assets First we will list the Fixed Assets, then the Current Assets.

11 Now the credit (CR) side , list the Capital and liabilities. As we can see this example only has one liability – Creditors, list the long term liability but put a 0 in the $ column.

11 Total assets should always be equal to capital + total liabilities. Accounting Equation:[ASSETS = CAPITAL + LIABILITIES]

Classified Balance Sheet:- Horizontal Format

Note 1

Anna's Ice cream shop Balance Sheet as at January 1st 2014 Dr $

$

$

Asset

Capital and Liabilities

Fixed Asset

Capital

Equipment

Cr $ 5 000

8 000 Long term liability

Note 2

Note 3

0

Current Assets Inventory

1 000

Current liability

Cash

4 000

Creditors

8 000

5 000 13 000

Note 4

13 000

A balanced, Balance Sheet

Note 4

The Balance Sheet – Order of Listing Assets and Liabilities can be listed in the following order:(a) permanence (b) liquidity. Assets  liquidity refers to haw fast assets can be converted into cash,therefor cash would be the most liquid asset 

permanence refers to the difficulty with which an asset can be turned into cash.

Liabilities  liquidity refers to how fast an obligation or debt becomes due. 

The longer an obligation or debt takes to becomes due the more permanent the liability.

Classified Balance Sheet -Order of liquidity XYZ Limited Balance Sheet as at December 31 20##

debit side (Dr) Assets

$

$

Current Assets Cash in hand Cash in bank Debtors Inventory

Capital and Liabilities

credit side (Cr) $ $

Current liabilities 500 5 000 10 000 2 000

Bank overdraft Short term loan Creditors

1 000 1 500 16 000 18 500

17500 Fixed Assets Computers Motor Vehicles Land and Buildings

Long-term liabilities 25 000 50 000 100 000

Long term loans

50 000

175 000 Capital

124 000

192 500

192 500

Classified Balance Sheet -Order of Permanence XYZ Limited Balance Sheet as at December 31 20##

debit side (Dr) Assets

$

$

Fixed Assets Land and Buildings Motor Vehicles Computers

Capital and Liabilities

credit side (Cr) $ $

Capital

124 000

100 000 50 000 25 000 175000

Long-term liabilities Long term loans

50 000

Current Assets Inventory Debtors Cash in bank Cash in hand

2 000 10 000 5 000 500

Current liabilities 175 00 Creditors Short term loan Bank overdraft

16 000 1 500 1 000 18 500

192 500

192 500