Balance Sheet/ Statement of Financial Position Terminology

What is the Balance Sheet Equation?

Short hand:

Assets = capital + Liabilities

Long hand:

Assets = capital + profit ( or - loss) + liabilities

( IT IS ALWAYS SHOWN VERTICALLY)

SOFP Terminology - Assets

Assets are resources of the business which are capable of providing future benefits and which can be measured in monetary terms.

SOFP Terminology - What are Current Assets?

Current assets are;

• Held for sale or consumption during the business’ operating cycle

• The are expected to be sold within one year

• They are held principally for trading

• They are cash or near equivalents to cash

SOFP Terminology - What are examples of Current Assets?

Examples of Current assets include;

• Inventory (stock)

• Accounts Receivable ( i.e. Debtors, Trade + other)

• Other Current Assets (i.e. Prepayments & Short - Term Investments)

• Cash and Cash equivalents ( Bank & Cash Balances)

SOFP Terminology - What are non - Current Assets?

Non - Current Assets are Other assets that do not meet the definition of current assets.

SOFP Terminology - What are some Examples of non-current assets?

(i) Property, Plant & Equipment (PPE)

• Land and Buildings

• Plant and Machinery

• Fixtures & Fittings, Equipment

• Motor Vehicles

(ii) Intangibles

• Patents, Trademarks, Brand names, Goodwill

• ( These are only non- current assets if these have arisen as a result of a monetary transaction).

(iii) Financial

• Investments (shares in other companies)

SOFP Terminology - How have assets been financed?

All assets have been financed either by;

(a) Equity (Capital financing provided by the owners + profits - losses)

(b) Liabilities ( loans + other)

• In total the equity and Liabilities represent the bottom half of the Statem

SOFP Terminology - What is Owners Equity?

Owners equity is;

• If the form of business is a sole trader or partnership this is the initial money that has been invested by the owner/s known as the capital.

• If the form of business is a company it represents the initial money that has been invested in the company through the buying of shares. This is known as the share capital.

The business is then regarded as an independent entity, and this in effect owes the owner/s for the money that has been invested in it.

SOFP Terminology - What are Profits?

• Any profits that are made belong to the owners and will increase the owners stake in the business (and any losses will reduce it)

Any profits will either be kept in the business for expansion or distributed to the owners

• In a company, profits are kept in the business for expansion are known as Retained reserves/ Retained Profits/ Retained Earnings

• Profits may also be set aside in a ‘Reserve’ for specific purposes e.g. redundancy payments expected to occur

SOFP Terminology - What are liabilities?

Liabilities are financial obligation of the business to people or firms outside the business.S

SOFP Terminology - What are Current Liabilities?

Current Liabilities are;

• Expected to be settles within the business’ normal operating cycle

• Held principally for trading purposes

• Due to be settled within a year after the statement of financial position date.

• Have No right to defer settlement beyond a year after the statement of financial position date.

SOFP Terminology - What are examples of Current Liabilities?

Examples of Current liabilities include:

• Trade payables (creditors)

• Taxation due (less than 12 months)

• Other Payables / Sundry creditors

• bank Overdrafts, Short term borrowings + Current portion of long term borrowings

SOFP Terminology - What are Non-current Liabilities?

Non-Current Liabilities are other liabilities that do not meet the definition of current liabilities.

SOFP Terminology - What are examples of Non-Current Liabilities?

Examples of Non-Current Liabilities are;

• Long-term Loans

• Bonds/Debentures (in a company)

SOFP Terminology - What is the format of Total Equity and Liabilities in a Balance Sheet?

Equity

(Initial capital invested + retained profits or any losses)

+

Non-Current Liabilities

+

Current Liabilities

+

Total Equity & Liabilities

• Total Equity & Liabilities represents the bottom half of the Statement of Financial Position ( Balance Sheet)

• Total Assets MUST equal Total Equity & Liabilities

• i.e The SOFP MUST ‘ Balance’