Session 10: Balance Sheet

Learning Objective

• Guiding participant on how to prepare Balance Sheet..

• Balance sheet
• Reserves
• Revaluation

Balance sheet is produced in order to show the financial position of the enterprise. The balance sheet for the year should be presented together with the prior year comparative results.

The required format for balance sheet should be as follows:

Non Current Assets

Remember these are assets that were not bought primarily for resale but are to be used in business and are expected to be used for a long time.

These assets can further be sub divided into Tangible and non tangible assets. Tangible assets are those with physical substance and can be touched, seen and be felt, while intangible are those without physical substance.

Examples of tangibles include:

Land and Buildings
Plant and Machinery
Motor vehicles
Fixture and fittings

Intangible assets include:

Goodwill
Trade license
Patent and trade mark
Development cost

All assets are expected to loose value due to passage of time, obsolesce, and wear and tear. This loss in value is called depreciation for tangible assets and amortization for intangible assets.

Current Assets

These are assets that are likely to change in the short term and certainly within the twelve months of the balance sheet date.

According to IAS 1 an assets should be classified as current when it:

a) is expected to be realized in, or is held for sale or consumption in the normal course of an enterprise’s operating cycle; or
b) is held for primarily for trading purposes or for the short term and expected to be realized within twelve months of the balance sheet date; or
c) is cash or a cash equivalent asset which is not restricted in its use.

Examples include the following:

Inventories
Receivables
Cash at bank
Cash in hand

Liabilities

Relates to amount which the business owes other business or individual. The liabilities can be classified as current and non current. Current liabilities are those which should be settled within twelve months of the balance sheet date while non currents assets are those which are supposed to be settled for a period covering more than twelve months.

Examples of current liabilities are:

Trade payables
Bank overdraft
Accrued expenses

Examples of non current liabilities include:

Bank loan
Debentures
Hire purchase and finance lease

Capital and Reserves

Reserves are those profit or gains made by the business which have not been distributed to the share holders as dividend. Limitation on distribution can either be reserving for future dividend, for future capital expenditure or because the companies act does not allow distribution of dividend out of these reserves.

Examples of reserves include:

Profit reserves
Revaluation reserves
General reserves

Capital for the companies is represented in form of shares which can either be ordinary and preference shares. Preference shares are those with a fixed percentage of dividend and usually do not carry voting rights. Ordinary shares are those held by the real owners of the business and always rank last in terms of dividend distribution and liquidation proceeds.