The Balance Sheet

Flowchart of Accounting Records

Source Documents

Journals

Trading, Profit & Loss Acc

Balance Sheet

Ledgers

Trial Balance

The Balance Sheet is prepared to show the financial position of the business with respect to its assets, liabilities and owner’s equity at that date.

The Balance Sheet is prepared to show the financial position of the business with respect to its assets, liabilities and owner’s equity at that date.

Assets

The assets of the business are what the business owns. They can be classified as:

1. Fixed assets – purchased for use in the business, are not for resale and can last for several accounting periods, e.g. machinery, furniture, motor vehicles, etc.

2. Current assets – easily liquidated, i.e. can be converted into cash during the operating cycle of a business, e.g. debtors, stock, cash and etc.

Liabilities

Liabilities represent what the business owes its external creditors, they are classified according to their period of payment as follows:

1. Long-term liabilities – debts of the business which have a repayment period of more than one accounting period, e.g. loans and mortgages.

2. Current liabilities – short-term debts of the business that are usually settled within one accounting period, e.g. creditors and bank overdrafts

Owner’s Equity

• Represents what the business owes its owner.• Capital provided by the owner is treated as a

loan to the business (accounting entity concept).• Represents the owner’s claim on the assets of

the business after the external debts and obligations have met.

Increase in the owner’s equity can be brought about by:• Addition to capital• Net profit from the year’s business activities

Decrease in the owner’s equity can be brought about by:• Drawings from the business for the owner’s private use• Net loss from the year’s business

activities

Owner’s Equity

Preparation of the Balance SheetThe Trial Balance of Chun as at 31 December 2002 is as follows:

Trial Balance as at 31 December 2002

Dr (RM) Cr (RM)

Capital, 1 January 2002 16,800

Drawings 260

Motor Vehicle 22,000

Fixture and Fittings 7,000

Stock, 31 December 2002 1,550

Creditors 5,750

Bank loan 8,000

Debtors 1,800

Cash at bank 2,500

Cash in hand 600

Profit and Loss Account 5,160

Balance Sheet as at 31 December 2002

RM RM RM RM

Fixed Assets: Owner’s Equity:

Motor Vehicle 22,000 Capital, 1 Jan 16,800

Fixture & Fittings 7,000 29,000 Add Net Profit 5,160

21,960

Current Assets: Less Drawings 260

Stock 1,550 Capital, 31 Dec 21,700

Debtors 1,800

Cash at bank 2,500 Long-term Liability

Cash in hand 600 6,450 Bank loan 8,000

Current Liability:

Creditors 5,750

35,450 35,450

RM RM RMFixed assetsMotor vehicle 22,000 Furniture & Fittings 7,000

29,000 Current assetsStock 1,550 Debtors 1,800 Cash in bank 2,500 Cash in hand 600 6,450

Less: Current liabilitiesCreditors (5,750)

Net current assets 700 29,700

Finance by:Owner's equityBeginning capital 16,800 Add: Net profit 5,160 Less: Drawings (260) Ending capital 21,700

Long-term liabilityBank loan 8000

29,700

Balance Sheet as at 31 December 2002

Balance Sheet• The Balance Sheet is not an account, so it

has no debit or credit sides.

• Assets are usually listed in the order in which they are readily converted into cash and liabilities are arranged according to the period in which they are discharged.

• The balances listed in the Balance Sheet will become the opening balances of the next accounting period.

Lecture Exercise1. Prepare the Balance Sheet of A. Ali from the following

balances as at 30 June 2002:

Capital, 1 July 2001 RM12,500

Net profit 4,680

Drawings 690

Cash in hand 500

Cash at bank 4,800

Debtors 3,660

Creditors 7,600

Stock in hand 1,960

Equipment 4,380

Motor vehicle 8,790(Balance $24,090)

A. Ali

B. Balance Sheet as at 30 June 2002

RM RM

Fixed Assets: Owner’s Equity:

Equipment

Motor vehicle

4,380

8,790

Beginning Capital 12,500

Add: Net Profit 4,680

Current Assets: 17,180

Stock, 31 Dec 1,960 Less: Drawings 690

debtors 3,660 Ending Capital 16,490

Cash at bank 4,800

Cash in hand 500 Current Liabilities:

creditors 7,600

24,090 24,090

RM RM RMFixed assetsEquipment 4,380 Motor vehicle 8,790

13,170 Current assetsStock 1,960 Debtors 3,660 Cash in bank 4,800 Cash in hand 500 10,920

Less: Current liabilitiesCreditors (7,600)

Net current assets 3,320 16,490

Finance by:Owner's equityBeginning capital 12,500 Add: Net profit 4,680 Less: Drawings (690) Ending capital 16,490

A. AliBalance Sheet as at 30 June 2002

Lecture Exercise

2. Determine the owner’s equity and prepare a Balance Sheet as at 31 December 2002.

Freehold premises RM100,000

Creditors 12,860

Debtors 15,000

Bank overdraft 10,370

Tools and equipment 26,000

Loan from Asia Bank 66,000

Stock of unsold goods 8,000

Cash in hand 150(OE $59,920 BS $149,150)

Balance Sheet as at 31 December 2002

RM RM

Fixed Assets Owner’s Equity: 59,920

Free hold premises

100,000

Tools &equip 26,000 Long term liabilities

Loan from Asia Bank 66,000

Current Assets:

Stock 8,000 Current Liabilities:

Debtors 15,000 Trade creditors 12,860

Cash in hand 150 Bank overdraft 10,370

149,150 149,150

RM RM RMFixed assetsFreehold premises 100,000 Tools and equipment 26,000

126,000 Current assetsStock 8,000 Debtors 15,000 Cash in hand 150 23,150

Less: Current liabilitiesTrade creditors 12,860 Bank overdraft 10,370 (23,230)

Net current liabilities 46,380 172,380

Finance by:Owner's equity 106,380

Long term liabilitiesLoan from Asia Bank 66,000

172,380

Balance Sheet as at 31 December 2002

Comprehensive ExerciseK Chen is a retailer and the following balances were extracted from his

books on 31 Dec 2006:

Stock, 1 Jan 06 12,400Stock, 31 Dec 06 10,650Office equipment 17,900Trade debtors 14,670Trade creditors 26,700Capital 30,000Drawings 800Sales 49,600Purchases 34,040Carriage inwards 393Carriage outwards 465Return inwards 440Return outwards 550Rent and rates 8,800Wages and salaries 9,600Cash at bank 6,950Cash in hand 392

Comprehensive Exercise (cont’...)

You are required to prepare:

a) The Trial Balance as at 31 December 2006.

b) The Trading and Profit and Loss Account for the year ended 31 December 2006.

c) The Balance Sheet as at that date.

• You are strongly encouraged to try both the traditional format and the vertical format.