Basic introduction of balance sheet

1. BALANCE SHEET
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2. A Balance Sheet is one of the
financial statements. A Balance
Sheet is a statement of assets
and liabilities of an enterprise at
a given date. It is also called
Statement of Financial Position.
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3. Introduction
 Balance Sheet will summarizes the financial condition of the business
at a point in time and it is described as a snapshot of a company.
 Balance Sheet shows the assets, liabilities and Equity at a certain time,
usually at the end of a fiscal quarter or year.
 Balance sheet presents assets on left hand side and equity and
liabilities on the right hand side. Some use Assets at the top and Equity
and Liabilities at the bottom of the page but the concept is the same.
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4. Features of Balance Sheet
 A balance sheet is only a statement and not an account. It has no debit side or credit
side. The headings of the two sides are ‘Assets’ and ‘Liabilities’.
 It is prepared at a particular point of time and not for a particular period. The
information contained in it is true only at the particular point of time at which it is prepared.
 It is a summary of balances of those ledger accounts which have not been closed by
transfer to the Trading and P & L Account.
 It shows the nature and value of assets and the nature and the amount of liabilities at
a given date.
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5. Need of Balance Sheet
 To ascertain the nature and value of assets of a business.
 To ascertain the nature and amount of liabilities of a business.
 To find out the financial solvency of an enterprise. An enterprise is
considered to be a solvent if its assets exceed its external
liabilities.
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6. Basic Principles of a Balance Sheet
 Most businesses borrow money to help them to operate.
 A balance sheet has a special section – called liabilities. This shows
how much money has been borrowed or invested – and where it came
from.
 The term ‘balance’ means that all the money invested or borrowed must
be accounted for in another section, called assets.
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7. General Format of a Balance Sheet
Assets
Current assets $XXX
Noncurrent assets XXX
Total assets $XXX
Liabilities
Current liabilities $XXX
Noncurrent liabilities XXX
Total liabilities $XXX
Owner’s equity XXX
Total liabilities and
owner’s equity $XXX
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10. What are Assets?
 last a long time e.g., buildings, vehicles, computers.
 cost a lot of money.
 could be sold to increase capital (i.e. money owned by the business).
Fixed assets are items owned by the company which:
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11. What are Assets?
Current assets include:
 Items used and replaced regularly e.g.,
raw materials or stock.
 Customers who owe money (called
debtors) for goods they have bought.
 Money in the current bank account.
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12. What are Liabilities?
Current liabilities are:
 Money the business owes to suppliers (called creditors) for goods
purchased on credit.
 Short term loans.
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13. What are Liabilities?
Liabilities also includes capital and reserves.
 Share capital is money which shareholders have invested in the business.
 Reserves = profit from previous years which has been kept to finance future
developments.
 Profit and loss account = money kept back from the current year’s profits.
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14. Balance Sheet Analysis
 Used to measure the financial condition of the business (management tool):
 Compare to other, but similar businesses.
 Compare to the same business over time.
 Lenders use balance sheet analysis to make lending decisions and to
monitor the financial progress of their customers.
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Balance Sheet Analysis
A. Measures of Liquidity:
1. Current Ratio
2. Working Capital
B. Measures of Solvency:
1. Debt/Asset Ratio
2. Equity/Asset Ratio
3. Debt/Equity Ratio

16. The Concept of Liquidity
 Short-term measure.
 Measures the ability to meet financial obligations:
 As they come due.
 Without disturbing normal revenue generating activities.
 Ability of the firm to generate cash for running the business.
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17. Measures of Liquidity
Current Ratio:
Total current farm assets ÷ Total current farm liabilities or CA/CL:
Example from text: 112,500 ÷ 88,860 = 1.27
 Write the Current Ratio as 1.27:1
 Current assets compared to current liabilities.
 Values > 1 are preferred (safety margin).
 Larger ratios imply more liquidity.
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18. Measures of Liquidity
Working Capital:
Total current farm assets - Total current farm liabilities:
Example: $112,500 - $88,860 = $23,640
 Working Capital as $23,640
 $ left after selling all current assets and paying off all current
liabilities.
 Margin of safety in a $ value.
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19. The Concept of Solvency
 Measures the degree to which liabilities are backed up by assets.
 Measures liabilities relative to owner equity.
 Ability to pay off all liabilities if all assets were sold.
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20. Measures of Solvency
Debt/Asset Ratio:
Total farm liabilities ÷ Total farm assets
Example: $368,860 ÷ $741,500 = 0.4975 x 100
 Debt/Asset Ratio as 49.75%
 % (share) of total assets owed to lenders.
 Lower values are preferred.
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21. Measures of Solvency
Equity/Asset Ratio:
Total farm equity ÷ Total farm assets
Example: $372,640 ÷ $741,500 = 0.5025 x 100
 Equity/Asset Ratio as 50.25%
 % of total assets financed by owner’s equity capital.
 Higher values are preferred.
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22. Measures of Solvency
Debt/Equity Ratio (leverage ratio):
Total farm liabilities ÷ Total farm equity
Example: $368,860 ÷ $372,640 = 0.99
 Debt to Equity Ratio as 0.99:1
 Lender financing compared to owner financing.
 Smaller values are preferred.
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conclusion
 A balance sheet shows the financial position of a business at a point in
time.
 Assets can be valued using cost methods or current market valuations.
 Liquidity measures the ability of the business to meet financial
obligations as they come due and without disturbing normal production.
 Solvency measures the degree to which the liabilities of the business
are backed up by its assets.

24. THANK YOU…
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