Balance sheet example

Perhaps you need more than 15 mins to read the balance sheet example and master it.

The balance sheet shows the financial situation of a company at a point in time (the balance sheet date). Balance sheet shows the economic resources controlled by the company, existing obligations and the net assets of the
required right of the owners, reflecting the economic resources controlled by the company and the assets for redeem the debt in the future.

A balance sheet must always satisfy the basic equation:

An asset is a resource controlled by the enterprise as a result of past events and form which future economic benefits are expected to flow to the enterprise. It has the following features:

• controlled by the enterprise
• past events
• future economic benefits.

Liabilities are an entity’s obligations to transfer economic benefits as a result of past transactions or events. It has the following features:

• obligations
• transfer economic benefits
• past transactions or events
• complementary nature of assets and liabilities.

Proprietor’s capital is the residual amount found by deducting all liabilities of the entity from all of the entity’s assets.

The balance sheet equation underlies the balance sheet in that every transaction of the enterprise affects the balance sheet twice. For the balance sheet accounts, at the left side of the equation (assets), “Dr” insteads increasing, “Cr” insteads decreasing; at the right side of the equation (proprietor’s capital and liabilities ), “Cr” insteads increasing, “Dr” insteads decreasing.

Each and every transaction that the business makes or enters into has two aspects to it and has a double effect on the business and the accounting equation. This is known as the dual aspect of transactions. So if a business buys some goods for cash, the two aspects of the transactions are that it now has some goods but it has less cash. Equally, if it sells some goods for cash, the effect is that cash has increased and a sale has been made on which there may have been a profit made.

Balance sheet example:

Classification of assets as current

An asset should be classified as a current asset when it:

• is expected to be realised in, or is held for sale or consumption in, the normal course of the enterprise’s opening cycle; or
• is held primarily for trading purposes or for the short-term and expected to be realised within 12 months of the balance sheet date; or
• is cash or cash equivalent asset which is not restricted in its use.

All other assets should be classified as non-current assets.

Classification of liabilities as current

A liability should be classified as a current liability when it:

• is expected to be settled in the normal course fo the enterprise’s operating cycle; or
• is held primarily for trading purposes; or
• is due to be settled within 12 months of the balance sheet date.

All other liabilities should be classified as non-current liabilities.

The balance sheet accounts (assets):

• Property, plant and equipment



• Goodwill



• Other intangible assets



• Investment in associates



• Inventories



• Trade receivables



• Other current assets



• Cash and cash equivalents.

The balance sheet accounts (proprietor’s capital and liabilities):

• Share capital



• Other reserves



• Retained earnings



• Minority interest



• Long-term borrowings



• Deferred tax



• Long-term provision



• Trade and other payables



• Short-term borrowings



• Current portion of long-term borrowings



• Current tax payable



• Short-term provisions.

Example

A trial balance of Aspring, a limited liability company, at 31 December 20X9:

Adjustments are required for:

• inventory at 31 December 20X9, at cost $15,000
• directors’ salaries not yet paid $5,000
• tax for the year $5,000
• depreciation charge for the year $4,600
• accrued audit fee $1,000
• creation of a plant replacement reserve of $1,000.

Now, preparing the balance sheet.

Solution

Workings

• Land and buildings: $230,000 – 104,600 = $125,400

For the trial balance shows: “Non-current assets, at cost: 230,000″.



• Inventory: $15,000

Adjustments are required for: inventory at 31 December 20X9, at cost $15,000.

• Receivables: $10,000

For the trial balance shows: “Receivables and payables: $10,000 and $2,000″.

• Cash at bank: $5,000

For the trial balance shows: “Cash at bank: $5,000″.

• Ordinary 50c shares: $60,000

For the trial balance shows: “Ordinary 50c shares: $60,000″.

• 5% $1 preference shares: $20,000

For the trial balance shows: “5% $1 preference shares: $20,000″.

• Plant replacement reserve: $1,000

Adjustments are required for: creation of a plant replacement reserve of $1,000.

• Accumulated profit: $11,400

Statement of changes in equity (reserve monvements only). See the income statement.

• 10% Loan notes: $50,000

For the trial balance shows: “10% Loan notes 20X9: $50,000″.

• Trade payables: $2,000

For the trial balance shows: “Receivables and payables: $10,000 and $2,000″.

• Tax: $5,000

Adjustments are required for: tax for the year $5,000.

• Accruals($5,000 + 1,000): $6,000.

Adjustments are required for: directors’ salaries not yet paid $5,000, accrued audit fee $1,000.

Related posts:

1. Balance sheet analysis
2. The balance sheet equation and methods of setting out
3. Balance sheet accounts payable
4. The difference between balance sheet and income statement
5. Current and liquid ratios