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Balance sheets are used by businesses to display to their stakeholders where the value of the business is currently located. The balance sheet is set out in a specific way, with different assets and liabilities of the business in different area so that the balance sheet (as the name suggests) balances. There are 4 main sections to the balance sheet and they are organised in the following order:

Contents 1 Fixed assets 2 Current assets 3 Current liabilities 4 Long term liabilities 5 Also See 6 Comments

Fixed assets

These assets are ones owned by the business that cannot readily be turned into cash. For example, the property owned by the business (factories offices etc.) would count as a fixed asset. Other fixed assets could be land owned by the company, Factory equipment, fixtures and fittings of the offices and vehicles owned by the business. In short it is items that are not intended for resale.

Current assets

There are assets that the business owns that can be easily turned into cash. These would include stock currently held, work in progress, finished stock on sight and cash held in the bank. Debtors, people that owe money to the business for purchases on credit would also count as a current asset.

Current liabilities

These are the areas in which the business owes money. For example, trade credit (the money that the business owes to suppliers etc) is a current liability. Tax outstanding, Loans that are less than 1 year in duration, dividends to be paid to shareholders and any overdraft at a bank account would also be current liabilities.

Net Current Assets (working capital) can be calculated by subtracting current liabilities form current assets. The most important figure in this area of the balance sheet is Current Assets Employed. This is worked out by the following formula: (Fixed assets + current assets) – current liabilities

This is the figure that will balance with the final section of the balance sheet.

Long term liabilities

These are the areas in which the business owes money in the long term. There are 3 main sections to this. The first is reserves. These are the finances given to the business by investors. This could be thought of as an asset however, the money must be paid back to the investors and is therefore deemed a liability. The second section is Share capital. This is the money that has been paid by shareholders to own the business and therefore it is the money that the business owes to them. The final section is long term loans (any loan over 1 year in duration).

The principle of balance sheets is that the Net Assets Employed and Long Term Liabilities balance each other out (if it doesn’t then something has been incorrectly calculated). This therefore shows the value of the business and where the money is coming from and to whom, what amount is owed.

Also See

Read these other AQA A2 Business Studies Unit 4 revision notes:

• Privatisation
• SWOT Analysis of the UK
• Balance Sheets
• Limitations of Accounts
• Profit and Loss Accounts
• Revenue and Capital Expenditure
• Market Analysis and Decision Making
• Marketing Maths
• Marketing Objectives and Decision Making
• Marketing Budgets
• Corporate Planning
• Management of Change
• Invention, Innovation and Design
• Network and Critical Path Analysis
• Business and the Law
• Employee Participation
• Human Resource Management
• Performance Measurement

Comments

These notes are aimed at people studying for AQA A2 Business Studies Unit 4, but will also be suitable for other courses and exam boards.

Originally submitted by eksman on TSR Forums.