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What is a Balance Sheet? - This is an often asked question . It is one of the key financial statements.
In order to calculate these working capital ratios we need to understand it a bit more.Sometimes you may also see it referred to as the Statement of Financial Position.
In this tutorial we look at a sample balance sheet. You will begin to see a consistency in balance sheet format the more examples that you will do.
In any common size balance sheet analysis there is a consistency of layout and common basic accounting terms that appear time and again.
These include fixed assets, current assets, current liabilities, long term liabilities,share capital and reserves.These are the headings and they are shown in a certain consistent way when accounting information is presented.
The more you understand the more you will learn how it is a very powerful statement and from that you can quickly get an idea of how the business is doing.
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If you prefer to read rather than watch the video here is a summary transcript:
"The key learning in this tutorial is really a quick introduction to this financial statement called the balance sheet.
So, what is a balance sheet definition? In earlier tutorials you’ll have picked up that it’s simply a list of balances that shows where money goes in the business.
You will start to see a consistency in terms of balance sheet format and you’ll start to see a consistency in terms of the terms actually contained in it.
You’ll very quickly learn that it shows a list of balances on a certain day with a common presentation such as the headline below: Fashion Mac Glam Handbags Balance Sheet as at 31st December 2011.
And here is that balance sheet example. Look at the headings on the left hand side. The first heading is Fixed Assets.
Then, look on the right hand side and you can see the column that shows that the balance of fixed assets as of 31st December is £16,000. These fixed assets are things that are going to benefit the business longer term, things like cars, land, buildings, plant and equipment machinery.
Directly underneath fixed assets you will see a heading called Current Assets. These, as we mentioned earlier, are the shorter term assets, those assets in the business that will benefit the business in under one year.
So, it’s going to be things like inventories as the balance sheet shows in Fashion Mac Glam Handbags to be £20,000. The next asset down is accounts receivables.
The main accounts receivable in any business is the trade account receivables or customers who the business has probably sold goods or services to on credit. In Glam Handbags we have a £20,000 balance outstanding as of 31st December from these customers. The next current assets down is bank.
Quite simply, these are bank balances and in Fashion Mac Glam Handbags these are £41,000 as of 31st December. And finally, we have cash, and this could simply be cash held on the premises or perhaps petty cash held for use in the business, and it’s a smaller balance of £2,000.
If we look at the next heading down, it’s Current Liabilities. So, these are current liabilities that the business has to pay in under one year.
The main liability in here usually is the trade accounts payable of the business, so these are suppliers that the business has bought goods or services from on credit. In the Glam Handbags business there are suppliers owed money to the tune of £19,000 as at 31st December.
We also see share capital funds of £67,000 and these are simply monies that shareholders have invested in the business, maybe to get it up and running. Plus, retained earnings of £13,000, and retained earnings are simply the retained profits in the business.