The Balance Sheet

Links to all exercises to pop up from this page

Definitions:

Fixed assets:items of a monetary value which have a long-term function and can be used repeatedly. These determine the scale of the firm's operations.

Examples are land, buildings, equipment and machinery.

Fixed assets are not only useful in the running of the firm, but can also provide collateral for securing additional loan capital.

Current Asset: anything owned by the organisation which is likely to be turned into cash before the next balance sheet date, usually within one year.

Typical Assets are stock, debtors and cash.

The balance of current assets over current liabilities is called working capital and, in essence, finances the organisation's day-to-day running.

Current Liability: anything owed by the organisation which is likely to be paid in cash before the next balance sheet date, usually within one year. Typical current liabilities are creditors, overdrafts, dividends, and unpaid tax.

Capital: to an economist, capital is one of the factors of production, the others being land, labour and entrepreneurship. To the business person it means funds invested in the company, either from the shareholders (share capital) or from lenders (loan capital). Both, however, recognise that capital is stored-up wealth, which when combined with the other factors of production, can be used to make goods and services more efficiently.

Stock: materials and goods required in order to produce for, and supply to, the customer. There are three main categories of stock: raw materials or components, work in progress and finished goods.

Debtors: are the people who owe you money. On a balance sheet, they represent the total value of sales to customers for which money has not yet been received. The way an organisation manages its debtors is often a key to its liquidity. Successful credit control ensures that credit is not extended to potentially bad debtors and that late-payers are chased.

Trade Creditors: provide business customers with time to arrange for the payment of goods they have already received. This period is one of interest-free credit, which helps the customer's cash flow at the cost of the supplier's. Although the typical credit period offered to customers is 30 days, the average time the customers take to pay is nearer 80 days.

Bank Overdraft: a facility that enables a firm to borrow up to an agreed maximum for any period of time that it wishes. An overdraft is a very flexible way of raising credit in that it need not even be drawn at all and the amount borrowed may fluctuate daily. Banks may offer overdrafts without security, though for larger sums they will take security by a floating charge on all the assets of the business. The actual sum borrowed through an overdraft facility at the end of the financial year is recorded as a current liability on the balance sheet.

Long-term liabilities: debts (creditors) falling due after more than one year. These include medium- and long-term loans, debentures and (possibly) provisions for tax payments or other long-term debts.