What is a Balance Sheet?
A balance sheet is a financial statement showing a business’s assets and liabilities at a particular point in time. Its accounting equation is: Assets = Liabilities + Capital.
Assets
- Fixed assets: don’t change form and aren’t for sale, e.g. buildings, motor vans, equipment.
- Current assets: change form during the year, e.g. stock, cash at the bank, cash in hand, debtors.
Liabilities
- Current liabilities: debts due within one year, e.g. creditors, bank overdrafts, wages.
- Long-term liabilities: debts not due within one year, e.g. bank loans, debentures, leases.
Types of Capital
- Fixed capital: money used to buy fixed assets.
- Circulating (floating) capital: money used to buy current assets, constantly changing form (e.g. cash, debtors, stock).
- Liquid capital: assets that can be readily converted to cash — current assets excluding stock. Liquid capital = current assets − stock.
- Working capital (net current assets): Working capital = current assets − current liabilities.
- Capital employed: Capital employed = total assets − current liabilities.
- Capital owned: the total initial capital actually invested. Capital owned = total assets − total debt to outsiders (or capital + net profit − drawings).
