Lecture 4 b practice economics

PRACTICE ECONOMICS…2

Ms Rosmin Bt Iqbal Hussain

BOptom (UKM), CMBA (UNIMAS)

Introduction

• Hi! We continue on to Balance Sheet!!!

BALANCE SHEET

What is a Balance sheet?

• The balance sheet is a financial statement

• It is a list of all the assets (what the business owns) and all the liabilities (what the business owes) of a business

The balance sheet is a financial “snap shot”

• It lists the assets and liabilities of the business on a particular day

Balance Sheet• A snapshot of the firm’s position

at a point in time• Shows what a company owns (assets)

and what it owes (liabilities)• Balance Sheet shows what assets a

company has (use of funds) and where the money came from to acquire those assets (source of funds)

Balance Sheet• A guide to the structure of the assets of a

company• A guide to the level of gearing – the ratio of

loan to share capital• Gives a guide as to the degree of working

capital – the amount the company has to be able to pay its everyday debts (current assets – current liabilities)

• Shows the total value of a firm at that moment in time

Total Fixed Assets

Land & Building

+ Vehicles

Fixed Asset

ADD Long Term Investments ( > 1 year)

X

X

(X)

(X)

X

+ X

XXX

+ XX

Current Assets

LESS Current Liabilities

ADD NETT Current Assets / Liabilities

X

(X)

+ XX

LESS Long term Liabilities ( > 1year)

XXX

(XX)

XXXX

Financed By:

Capital

Less Drawing

Nett Profit / Loss

XXX

(XX)

XXX

XXXX

AD NBV

minus

Cost

Value in Bracket ( ) indicate a negative value- need to subtract it

Must balance*same value

Fixed Assets• Inclusive of:

– Land & building– Vehicles– Machineries– Furniture & Fitting & etc

Cost of each of this Fixed Asset - its Accumulated Depreciation = Net Book Value

(AD) (NBV)

Add all the NBV of each = Total Fixed Tangible Asset Total Fixed Asset = Total Fixed Tangible Assets + Long Term Investments

Also a type of fixed asset

Total Fixed Assets

Land & Building

+ Vehicles

TOTAL Asset

ADD Long Term Investments

( > 1 year)

X

X

(X)

(X)

X

+ X

XXX

+ XX

Current Assets• Refers to any assets that can be liquidified in one

financial year– Stock (closing stock)– Net Debtors– Bank– Cash– Prepaid expenses (only the amt of bills paid forefront)

– Accrual received (income received + balance of income that will be paid later which is not yet received) e.g tenant has half rental deposit left to pay, this unpaid value yet must be included

Net debtors = debtors minus provision for doubtful debts (bad debts)• Also known as trade receivables, trade debtors, account receivables or just debtors (its

understood any amt of debtors must minus out bad debts

Accrual = pending balance to be paidPrepaid = paid beforehand

Current Liabilities

• Refers to:– Creditors (short term)– Bank Overdraft– Accrued expenses (only the amt not paid yet, or amt pending

but not shown in the bill)

– Prepaid revenue (only the amt that has been prepaid by customers)

Accrual = pending balance to be paidPrepaid = paid beforehand

Net Current Asset / Liability

• Equals to Net Current Asset = Current Assets - Current Liabilities

or Liabilities

It is net current asset when asset value > liabilities value

It is net current liabilities when asset value < liabilities value

Therefore, net current asset/liabilities is negative value when indicated in brackets & actually refers to liabilities being surplus. Positive value without brackets refer to assets being surplus

Net Current Asset / Liability… cont

Current Assets

LESS Current Liabilities

NETT Current Assets / Liabilities

X

(X)

XX

Current Assets

LESS Current Liabilities

NETT Current Assets / Liabilities

X

(X)

(XX)

1. Positive value - therefore it refers to net current assets

2. Negative value - therefore it refers to net current liabilities

Notice that net current asset/liabilities = CA - CL

Balance Sheet Value…1

TFA + (NCL) or NCA + (LTL) = BSV

TFA = total fixed assets

NCL = net current liabilities; note brackets indicating -ve value bcoz it is a liability to the company

NCA = net current assets

LTL = long term liabilities; note brackets indicating -ve value bcoz it is a liability to the company

BSV = balance sheet value

BALANCE SHEET VALUETotal Fixed Assets

Land & Building

+ Vehicles

Fixed Asset

ADD Long Term Investments ( > 1 year)

Total Fixed Assets

X

+ X

XXX

+ XX

XXX

ADD NETT Current Assets / Liabilities

(Current Asset - Current Liabilities)

+ XX

LESS Long term Liabilities ( > 1year)

BALANCE SHEET VALUE (net assets)

XXX

(XX)

XXXX

Financed By:

Capital

Less Drawing

Nett Profit / Loss

BALANCE SHEET VALUE (amt invested in co)

XXX

(XX)

XXX

XXXX

BALANCE SHEET VALUE…2

Capital + (Drawing) - Net profit or (Net Loss) = BSV2

BSV 1 = BSV 2 Must equal!!

Notice Net loss in bracket indicative of -ve value

Trial / Balance As At (date)Debit Credit

Trial / Balance

• Involves all the items, transactions & values in the TPL & BS

• Just put each into the credit / debit location

• All -ve values in the credit portion is shifted to the debit portion (the -ve sign is dropped)

Balance SheetTotal Fixed Assets

Land & Building

+ Vehicles

Fixed Asset

ADD Long Term Investments ( > 1 year)

X

+ X

XXX

+ XX

Current Assets

LESS Current Liabilities

ADD NETT Current Assets / Liabilities

X

(X)

+ XX

LESS Long term Liabilities ( > 1year)

XXX

(XX)

XXXX

Financed By:

Capital

Less Drawing

Nett Profit / Loss

XXX

(XX)

XXX

XXXX

minus

Must balance*same value

Trading Profit & Loss Acct

Sales

Less Sales Return / Return Inward

Less Cost of Goods Sold

X

X

X

= Gross Profit x

Add Other Revenue / Income X

Less Expenses / Overheads x

= Net Profit / Loss x

Debit Credit

END• This completes my

lesson on economics! I hope you enjoyed the tour. Economics is an important part of our lives. Think of all of the ways you use economics everyday!

Goodbye!

NOTES

CURRENT ASSETS

• Current assets mean that the assets will not stay in the business for long

• Examples: materials, debtors, money in the bank, petty cash

CURRENT LIABILITIES

• The amount of money that a business owes other people and other businesses (creditors)

• Liabilities are “current” because the amount owed can vary from one day to the next

• They must be paid back within a year

NET CURRENT ASSETS

• ASSETS minus LIABILITIES

(current & fixed) (current)

LONG TERM LIABILITIES

• These are debts need paying back in the future (one year +)

• Examples: Loans, mortgages

NET ASSETS

• ASSETS minus LIABILITIES (current & fixed) (Current & fixed)

The second section of the balance sheet

• This looks at where the money which was used to buy the long term and short term assets came from

The start up of the business is funded by:

CAPITAL & RESERVES• SHARE CAPITAL – The amount of money

paid by shareholders in return for a share in the business.

• PROFIT & LOSS ACCOUNT – Net profit from the previous financial year is transferred into the balance sheet.

• RETAINED PROFIT – businesses do not give all of their profits back to shareholder

• NET ASSETS SHOULD EQUAL THE AMOUNT OF MONEY THAT HAS BEEN INVESTED IN THE BUSINESS

• BOTH PARTS OF THE BALANCE SHEET MUST BALANCE

MaterialsInventory

FinishedGoods

Inventory

Revenues

Cost ofGoods Sold

INCOME STATEMENT

PeriodCosts

InventoriableCosts

BALANCE SHEET

Equals Operating Income

whensalesoccur

deduct

Equals Gross Margindeduct

Work inProcess

Inventory

Manufacturing Company

Merchandising Company

INCOME STATEMENTBALANCE SHEET

whensalesoccur

InventoriableCosts

MerchandisePurchases Inventory

Revenuesdeduct

Cost ofGoods Sold

Equals Gross Margindeduct

PeriodCosts

Equals Operating Income

END