SUBJECT: FINANCIAL ACCOUNTING
CLASS: SS 1
DATE:
TERM: 3rd TERM
TOPIC: BALANCE SHEET
CONTENTS
- Meaning of the Balance Sheet
- Layout of the Balance Sheet
- Definition of terms/contents of the Balance Sheet
The Balance Sheet is a statement of the financial position of a business on a certain date. It shows the assets, liabilities and the capital of the business in a well arranged form.
Unlike a Trading, Profit and Loss Account, a Balance Sheet is not part of the double entry system. After the nominal account balances have been transferred to the Trading and Profit and Loss Account, the only balances left in the ledger are those for assets and liabilities. The Balance Sheet is a list of these balances.
Although a Balance Sheet is not an account, The Trading and Profit And Loss Account and the Balance Sheet are known collectively as the final accounts of a business.
LAYOUT OF THE BALANCE SHEET
The Balance Sheet is prepared by listing and grouping the assets and liabilities of the business under appropriate headings as below:
Fixed Assets
Current Assets
Current Liabilities
Long - term Liabilities
Capital
Using the illustration worked out in the last example, the Balance Sheet will be as shown below:
Ade Molayo
Balance Sheet as at 31st December, 2015
N Fixed Assets: N N
Capital 60,000 Land & Buildings 40,000
Add: Net Profit 8,760 Office Furniture 5,000
68,760 Motor Vehicles 14,000
Less: Drawings 10,920 59,000
57,840
Long – term Liabilities: Current Assets:
Loan from T. Lawal 10,000 Stock 2,700
Sundry Debtors 7,400
Current Liabilities: Bank 2,160
Sundry Creditors 3,420 12,260
71,260 71,260
- A Balance Sheet is a ‘position’ statement showing the position of a business at a particular date. It is not a ‘period’ statement like a Trading and Profit and Loss Account.
- The fixed assets are listed in order of permanence. The order is:
Land and Buildings
Plant and Machinery
Furniture and Fittings
Equipment/ Tools
Motor Vehicles
- The current assets are listed in the reverse order of realisability i.e. the ease at which they can be converted to cash. The order is:
Stock
Debtors
Bank
Cash
- The total of the fixed and current assets N(59,000 + 12,260) less the total of the current and long - term liabilities N(3,420 + 10,000) equals the closing balance on the Capital Account N57,840. This demonstrates the accounting equation i.e. assets – liabilities = capital
- At the end of the year, the balances on the Profit and Loss Account and Drawings Account are transferred to the Capital Account(by Journal entries). However the details are still shown in the Balance Sheet to show how the closing capital is arrived at.
EVALUATION
- Simplified and Amplified Financial Accounting. Exercise 1 & 2
- Simplified and Amplified Financial Accounting. Exercise 3,4 & 5
DEFINITION OF BALANCE SHEET ITEMS
- ASSETS: These are the resources, properties or possessions owned by the business as well as what other people or firms owed the business. Examples are Land and Buildings, Motor Vehicles, Furniture,Equipment,Machinery,Tools, Stock, Cash at hand, Cash at Bank, Debtors etc. Assets can be divided into fixed assets and current assets.
- Fixed Assets are long lasting assets which are acquired for use rather than for resale. Fixed assets help the business to earn revenue. Examples are Land and Buildings, Plant, Machinery, Motor Vehicles, Furniture, Fittings, Tools, Equipment etc.
- Current Assets are assets which are usually held by the business for a short period of time. They are usually converted from one form to another in the course of business. Current assets are either in form of cash or can be turned to cash relatively easily. Examples are Stock (Inventory), Trade Debtors (or Sundry Debtors), Bank and Cash.
- LIABILITIES: These are obligations arising from past transactions. It is a claim by outsiders on the assets of the business. Liabilities represent what the business owes other people or firms. Liabilities can be classified as current liabilities and long - term liabilities.
- Current Liabilities are short - term liabilities. They are the amountsowed by the business which are due for settlement (repayment) within the next twelve months (i.e. one year) of the date of the Balance Sheet. Examples are Trade Creditors (or Sundry Creditors), Bank Overdraft etc.
- Long - term Liabilities are amounts owed by the business which are not due for repayment within the next twelve months (i.e. one year) of the date of the Balance Sheet. Examples are Long - term loans, Mortgages, Debentures etc.
The Balance Sheet can be prepared in two ways – horizontal format and vertical format. The Balance Sheet earlier prepared for Ade Molayo was prepared in the horizontal format.
The same Balance Sheet prepared in the vertical format is shown below:
Ade Molayo
Balance Sheet as at 31st December, 2015
NNN
Fixed Assets:
Land and Buildings 40,000
Office Furniture 5,000
Motor Vehicles 14,000
59,000
Current Assets:
Stock 2,700
Sundry Debtors 7,400
Bank 2,160
12,260
Current Liabilities:
Sundry Creditors 3,420
Net Current Assets 8,840
67,840
Long - term Liabilities:
Loan from T. Lawal 10,000
57,840
Financed by:
Capital at 1st January, 2015 60,000
Add: Net Profit for the year 8,760
68,760
Less: Drawings 10,920
57,840
NB:
- There is only one current liability so this has been shown in the centre column. If there had been more than one they would have been listed in the first column and the total shown in the centre column.
- The main advantage a vertical Balance Sheet has over a horizontal Balance Sheet is that it shows the figure for the net current assets. This is also known as the working capital.
- The long - term liability has been deducted in the first section of the Balance Sheet. Alternatively, it could have been added to the final balance of the Capital Account in the second section of the Balance Sheet.
EVALUATION
- Simplified and Amplified Financial Accounting. Exercise 6 and 7X
- Business Accounting 1 Exercise 8.3
READING ASSIGNMENT
- Simplified and Amplified Financial Accounting Page 188 - 196
- Business Accounting 1 Page 58 - 71
GENERAL EVALUATION QUESTIONS
- Business Accounting 1. Exercise 8.4, 8.5Aand 8.6A
- Simplified and Amplified Financial Accounting. Questions 5X, 6, 7X and 8X
WEEKEND ASSIGNMENT
- Assets minus liabilities of a business always give (a) profit (b) bank balance (c) capital (d) drawings
- Debentures is classified as (a) capital (b) fixed assets (c) short - term liability (d) long - term liability
- Which of the following is added to the proprietor’s capital (a) net profit (b) gross profit (c) net sales (d) gross sales
- Which of the following is not part of the double entry system (a) Trading Account (b) Profit and Loss Account (c) Balance Sheet (d) Cash Book
- Which of the following statements is not correct (a) profits increase capital (b) losses reduce capital (c) drawings reduce capital (d) drawings increase capital
THEORY
- Mention a class of account that will always show :
- debit balance (b) credit balance
- Explain the following:
- fixed assets (b) current assets (c) current liabilities (d) long - term liabilities (d) capital
WEEK 10 Date………………………..
TOPIC : OPENING ENTRIES
CONTENTS :
- Opening Journal entries
- Recording of subsequent financial transactions
When a business begins the capital will consist of cash, money in the bank and other assets. To record this event, a set of books must be opened. Also, on deciding to keep his books on double entry principle or on opening a new set of books the trader will record what is known as opening entries. For the three cases identified above, the General Journal (or Principal Journal or Journal Proper) is used to record the opening entries.
The trader will summarise his financial position. This summary will disclose that he has certain assets, valuable possessions and properties which is to be used in the business. In addition certain sums of money may be owing to him by customers, while, on the other hand, he may owe various sums. The latter are his liabilities, and, taking the total of these from his assets, he is able to say what he is worth financially. That amount by which his assets exceed his liabilities is called his capital.
The summary as described above is recorded in the General Journal and is known as the opening entries.
Illustration:
William Kamara decides to open a set of books on double entry principle. His business affairs on 1st July, 2017 stand as follows: office cash N13,300; bank balance N27,700; value of motor vehicles N42,000; stock of goods N14,200; two debtors Olamide and Victoria owe him N21,800 and N18,000 respectively. He owes two creditors B. Mohammed and S. Talabi, N7,000 and N20,000 respectively.
Required: Prepare the journal entries to open the books of William Kamara as at 1st July, 2017.
General Journal
2017 N N
Jul 1 Cash CB 13,300
Bank CB 27,700
Motor Vehicles GL 42,000
Stock GL 14,200
Olamide SL 21,800
Victoria SL 18,000
- Mohammed PL 7,000
- Talabi PL 20,000
Capital GL 110,000
being assets, liabilities and capital at this date 137,000 137,000
The items in the above opening entries are then posted to the ledger, the assets being debited to the respective asset accounts, the cash and bank balances in the Cash Book, the stock to the Stock Account, the value of the motor vehicles to the Motor Vehicles Account and the debts due to the respective debtors accounts. The liabilities are posted to the credit of the respective accounts and the capital to the credit of the Capital Account - to show the amount invested in the business by the owner and the extent the business is indebted to him. The appropriate folio numbers are, of course, inserted.
The entries in the ledger accounts are usually described in the narration column as ‘balance’ as they usually represent the balances of accounts brought down from the previous period.
These items having been posted, the books are ready for the subsequent transactions to be entered as and when they occur. In examination tests, students may be required to prepare the opening entries and also record the subsequent transactions. The procedure described above will then have to be done before the transactions are recorded.
EVALUATION
- Simplified and Amplified Financial Accounting Exercise 3X and 7X
READING ASSIGNMENT
- Business Accounting 1. Page 232 - 239
- Simplified and Amplified Financial Accounting. Page 127 – 133
GENERAL EVALUATION QUESTIONS
- Business Accounting 1. Exercise 25.1 and 25.2A
- Simplified and Amplified Financial Accounting. Exercise 5, 6 and 8X
WEEKEND ASSIGNMENT
- Which of the following accounts belong to the purchases ledger (a) bank (b) creditors (c) salaries (d) debtors
- The statement which shows the financial position of a business at a given point in time is (a) trial balance (b) cash book (c) bank statement (d) balance sheet
- The drawings account of a sole trader is transferred to the (a) trading account (b) profit and loss account (c) capital account (d) discounts account
- The salary of a shopkeeper who sell goods would be charged in the (a) Balance Sheet (b) Sales Account (c) Trading Account (d) Profit and Loss Account
- Capital is the (a) money owed by a business to others (b) money owed to a business by others (c) liability of the business to its proprietor (d) total of the long - term liabilities.
THEORY
- a. What is a Journal Proper
- Enumerate eight uses of the Principal Journal
- Explain four differences between a trial balance and a balance sheet.
