BALANCE SHEET

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    Accounting equation

    The basic accounting equation is :

    Resources supplied by the owner = resources in the business

    Resources supplied by the owner is called capital in accounting. Resources present in a business are called assets.

    Capital = net assets or

    • Capital= assets – liabilities

    Balance sheet

    It is a statement drawn up at the end of each period stating there in all the assets and liabilities of a business arranged in the customary order to exhibit the true and correct state of affairs of a business on a particular date.

    Balance sheet is prepared from a trial balance after the balances of nominal accounts have been transferred to either trading account of profit and loss account. The remaining balances of personal or real accounts either show assets or liabilities.

    The accounting equation is presented in a form of financial statement called balance sheet. The balance sheet shows the financial position of a business at a particular time.

    There are 2 formats of balance sheet, however i’d only outline the easier one

     

    Working capital : current assets – current liabilities

    This capital represents the amount of resources a business has in a form that can be readily converted to cash.

    Drawing are the resources the business owner withdraws for his personal use.

     

     

     

     

     

     

     

    Fixed assets

    A                                                       XXX

    B                                                       XXX

    C                                                       XXX

    Add Current assets

    A                                                       XXX

    B                                                       XXX

    C                                                       XXX

    Less current liabilities                      XXX

    Working capital ( assets – current liabilities) :      YYY

    Less long term liabilities                             XXX

    Capital                                                       YYY

    Add net profit                                   XXX

    Or

    Less net loss                                                XXX

    And

    Less drawings (If any)                      XXX

     

    Consider the following example

    Balance of k m traders at 31 dec 2011

    Premises                        $1500

    Motor vehicle                           $500

    Cash at hand                            $200

    Cash in bank                            $5000

    Drawings                        $50

    Creditors                        $550

    Debtors                          $300

    Loan to be returned 2 years later $500

    Net profit                       $5500

    Balance sheet at 31 dec would be

     

     Fixed assets

    Premises                        $1500

    Motor vehicle                           $500

    Add Current assets

    Debtors                          $300

    Cash in bank                            $5000

    Cash at hand                            $200     .                                            _______

    $7500   .

    Less Current liabilities

    Creditors                        $550

    _________

    Working capital                                                                      $6950     .

    Less Long term liabilities        $ 500                                                 ________

              Capital                                                                          $6450     .

    Add net profit                          $5500

    Less drawings                          $50                                                    ____________

    $11900