Accounting Equation : Assets - Liabilities = Capital
This means that when preparing a balance sheet there will always be two figures which are the same, remember t is a snapshot on a given day ( 31st December).
(Please click on the balance sheet to open in a new window)
The Balance Sheet Words
For more information on classes or workshops with The Boston School please telephone
(+41) 044 302 7838
or
Asset
An item of value owned by the business
Current Asset
Assets which are expected to be used up and replaced within one year. They are sometimes referred to as short term assets. They can include stocks of goods and partially finished goods known as work in progress.
Share Capital / Paid In Capital
It is usually written as ordinary and preference shares. Loan capital (which is simply a grand name for long term loans)
Current Liability
Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Money owed to suppliers is referred to as Trade creditors or Accounts payable.
Long term Liability
Amounts owed which are payable after one year (mortgages and debentures).
Fixed Assets + Current Assets - Current Liabilities - Long term Liabilities = Capital + profit - drawings
Bank & Cash
Amounts held in the bank and in cash (petty cash) are listed in the Current Assets section of the Balance Sheet.
If the amounts are in deficit, then the bank account is said to be an overdraft and will not appear in current assets but will be found in the Current Liabilities section of the balance sheet.
Fixed Assets
Assets used within the business and not acquired for the purposes of resale. These include land, buildings, plant and machinery ( turbine, computers, test equipment). Fixtures and fittings, such as light fittings and shelving and motor vehicles (vans and cars) are listed separately.
Fixed assets must be shown at original cost(purchase price) or valuation. Valuation is preferred in the case of assets which have changed significantly in value since original purchase. For example the current value of land and buildings can be quite different from the original cost. A Swiss bank may have purchased some offices in central Zürich many years ago for SFr50K, they are shown in the balance sheet today at a value of SFr50m.
Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give net book value. Annual depreciation can also be seen in the profit and loss account and can be a confusing calculation to understand.
Goodwill
Goodwill can be described in two ways:
Inherent goodwill, which is supposed to reflect the reputation and other positive characteristics of the business which are all difficult to put a value on and should not appear on the Balance Sheet. Purchased goodwill, which is the excess of purchase price over fair value of the net assets of the business acquired by the purchaser may appear on the balance sheet. A fun activity is to deduct this from the liabilities to see what impact it has upon the company worth.
Reserves
Reserves can include profits made and not passed on to the owners, usually the amount left in the business after a dividend is paid. These are some times known as retained earnings.
Capital reserves which can not be passed on to owners and represent the perceived increase in valuation of some fixed assets, such as property or an art collection.
Shares
Amounts invested in a company by its owners. Owners of companies are called shareholders
Net current assets
Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities and is what finances the business on a day to basis.
Net Assets
Is the difference between the total assets and total liabilities.
For more information please telephone
Rose Nassif Travers on (+41) 044 310 30 38
The Boston School Schaffhauserstrasse 331 8050 Zürich
The Boston School
opens doors ...
