BALANCE SHEET
As stated earlier, one of the accountant's duties at the end of an
accounting period is the preparation of a statement that describes
and values the resources owned, and the debts owing, by the business
on that date. The accounting equation in the form
| capital |
+ |
long-term liabilities |
= |
fixed assets |
+ |
current assets |
fulfils the requirements, but is too clumsy.
The clumsiness can be overcome without losing the important factor
of equality by arranging the equation in the form of a balance sheet.
The equation: capital + liabilities = assets is shown here in the
form of a vertical balance sheet:
Balance Sheet As At (Date)
 |
| | |
| FIXED ASSETS | | 18000 |
| CURRENT ASSETS | | |
| CASH ON HAND | | |
| DEBTS DUE FROM CLIENTS | | |
| STOCK FOR RE-SALES | | |
| PAYMENTS MADE IN ADVANCE | | 15000 |
| | |
| | | 33000 |
| | | |
| CAPITAL | | 25000 |
| LONG-TERM LIABILITIES | | 5000 |
| CURRENT LIABILITIES | | |
| TRADE CREDITORS | | |
| BILLS PAYABLE | | 3000 |
| | |
| | | 33000 |
| | | |
The equation can be stated horizontally with equal validity
|
| | |
| ASSETS | : | CAPITAL | |
| | : | LIABILITIES | |
or, as an alternative, a vertical balance sheet can be produced.
Assets
Current assets are short-term assets. Here are some examples:
cash on hand, or at the bank
debts due from customers, including:-
debtors; bills receivable(acceptance by the debtors to pay on a due date eg, 90days).
Stock held for resale
payments made in advance for services still to be supplied.
Fixed assets are long-term (more than one year), or permanent assets,
depending on their life expectancy. Here are some eg, land and buildings,
plant and machinery, furniture and fittings, motor vehicles, hand tools.
Non-fixed and non-current assets: this may seem to be a contradiction,
but some assets do not fall conveniently under either of the two other headings.
Such assets are disclosed, between fixed and current assets, with a relevant
description, and no class heading. Here are some examples:
Trade investments that are purchased to protect some aspect of the business
operations, eg, shares in a supplier company.
Investments in an associate company (a company that is effectively a partner
in a joint venture or consortium).
Investments in subsidiary companies, ie, where the investing company holds more
that 50% of the issued ordinary share capital of the other company.
Investment in shares of a company quoted on the stock exchange.
Investment in fixed interest-bearing loans (including debentures).
Intangible assets, eg, goodwill, patents.
Intangible assets are those that have no material existence, but that are nonetheless
valuable. An example would be the advantage gained by owning patent rights. As
you can imagine, it is extremely difficult (if not impossible) to place an accurate
monetary value on such rights, therefore such intangibles should not be disclosed
in the balance sheet because of this arbitrary nature. Goodwill is based upon the
assumption that a long-established business is better off than a new business because
the reputation that it has built up over the years of trading should enable the
production of proportionately larger profits. It is not recommended that goodwill be
disclosed on the balance sheet, again due to its somewhat arbitrary nature.
One type of intangible asset that is never given an accounting or economic value is
labour - skilled or otherwise. Obviously, the employee's expertise is an asset, but
no monetary value is ever placed upon it, and the only effect that it has is the
amount paid as salaries and wages.
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