5.4 Balance sheets

Cambridge IGCSE Business Studies 5.4 Balance sheets

5.4.1 The main elements of a balance sheet

Balance sheet – Financial statement which shows the value of a business’ assets, liabilities, and equity at a point in time.

3 Main Sections of a Balance Sheet

1. Assets
2. Liabilities
3. Equity

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Assets – Items which are owned by the business

– Current Assets – Items owned and used by the business within a year. e.g. Stock (inventory), cash, debtors

– Non-current (fixed) Assets – Items owned by the business for more than one year. e.g. Buildings, vehicles, machinery, ovens,

Tip: Make sure you can come up with examples! + Read the case study before answering balance sheet question.

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Liabilities – Debts owed by the business

– Current Liabilities – Money owed by the business which must be repaid within a year. e.g. Bank overdraft, creditors

– Non-current Liabilities – long-term borrowings which do not have to be repaid within a year. e.g. Long term bank loans,

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Equity (aka Shareholder’s equity, shareholder’s fund) – Total amount of money invested into the business by the owners of the company.

– Share capital (Money raised from selling shares)

– Retained profits

– Reserves

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5.4.2 Interpret a simple balance sheet and make deductions from it

Interpreting balance sheet

• How a business is financing its activities.
  Business expansion can be funded by increasing non-current liabilities e.g. long-term loans, or through increasing shareholder’s equity e.g. selling more shares (share capital), retained profits.

• What asset a business owns
  Can be seen from the assets section of the balance sheet

• Sale of inventory to raise finance
  If this occurs then inventory (stock) would decrease on the balance sheet

Balance sheet equations

• Equity = Total Assets – Total Liabilities
  
• Working Capital = Current Assets – Current Liabilities
  ^ Money required to pay for day to day expenses)
  
• Capital Employed = Equity + Non-Current Liabilities

Note: There are many accounting terms used by different textbooks/websites/exams. e.g. Equity could be called Shareholder’s fund. Complete lots of past papers to make sure you are aware of the terms used in your exam.

5.4 – Balance sheets is a quantitative part of the syllabus. Practicing lots of questions on your textbook + past papers will help with this topic.