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Chartered Management Accountant, Certified Practising Accountant

and Registered Tax Agent

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Understanding Your Balance Sheet – 1. Make Up - Assets

Posted on 31 August, 2014 at 21:42
Most small businesses and sole traders, when looking at their accounts, will concentrate solely on their Income/Profit and Loss statement. However, as bigger businesses are more likely to understand, the Balance Sheet of a business can be just important.

While an Income or Profit & Loss Statement can give an immediate snap shot of whether a business is making money for that current year a Balance Sheet can give an indication of the overall status of a business – it’s total value. The Balance Sheet can also give an indication of what monies are owing or are owed, indicate how much money an owner or owners have put into the business, and, when reconciled properly, can highlight errors, missed payments etc.

I will therefore be doing a short series of posts about the Balance Sheet and how it can be understood and used.

Make Up

Before delving into Control Accounts, Reconciliations etc. it is important to know and understand the different categories of accounts that make up a Balance Sheet. Broadly speaking there are three main categories of accounts that make up a Balance Sheet, but each of these categories can then be further broken down: ·        

  • Assets
  • Liabilities
  • Equity

Assets

Assets are accounts that reflect value to a business. They give an indication of what the business owns, what value is held by the business, and what monies are owed to the business. The Assets category can be broken down into several other categories as follows:

  • Intangible Assets
  • Fixed Assets
  • Current Assets
  • Longer Term Assets > 1 Year

We will look at each of these categories in turn.

Intangible Assets

The word “Intangible” means “unable to be touched” or “not having physical presence” and this definition holds true with regard to Intangible Assets.

  • Intangible assets are long term resources that give value to a business but which have no physical existence. There are arguably three main “types” of Intangible Assets:
  • Branding – Branding includes the brand name of a company’s products, or the company name itself – the more recognised the brand name the greater its value. Branding would also include logos etc.
  • Intellectual – This would cover any Trademarks or Patents that the company owns. This type of Intangible Asset is more definite as most Trademarks and Patents last for a defined time period, and these can therefore be depreciated. Intellectual would also cover licences, i.e. Franchise License etc.
  • Goodwill – Goodwill is generally the “value added” to a business when it is sold. It can be defined as the difference between the “actual book value” of a business and the price paid for that business. It is a recognition of the reputation, customer base etc. that a business holds, and will generally include the perceived value of brands, logos etc.

Fixed Assets

Fixed Assets are much easier to define as they are any items purchased for the business that cost $100 or more.

There are generally several categories of Fixed Assets, most of which are self-explanatory. The more common categories are as follows:

  • Buildings, Land
  • Leasehold Improvements – Any alterations to existing premises that adds value to those premises
  • Plant & Equipment – Any heavy duty machinery etc. used for construction, manufacturing etc.
  • Furniture and Fittings
  • Computer Equipment
  • Office Equipment

All fixed assets will have a useful life and a depreciation rate as defined by the tax office, and can be written down as per the defined rate.

Most Balance Sheets will show two accounts for each type of Fixed Asset, one account for the original cost, and one account for the depreciation to date. The net of these two accounts will be the current “book value” of the Fixed Assets.

Current Assets

Current assets are those assets that are used on a regular basis and often the account balances of these assets can change on a daily basis. These assets cover money, stock, monies owed etc. The primary categories for current assets are as follows:

  • Cash in Bank and On Hand – Includes all bank accounts (except loans), petty cash etc.
  • Stock – Any stock that a business may hold be it Raw Materials or Finished Goods.
  • Debtors – This includes not only monies owing from clients, but also any other short term loans that may have been made to staff etc.
  • Prepayments – These reflect any monies that have been paid up front for a service, license etc. that covers up to a period of a year – e.g. Insurance paid at the beginning of a year that last for a year. (Prepayments are more likely to be used by companies and businesses who produce accounts on a monthly or quarterly basis, rather than smaller businesses who only produce accounts on an annual basis).

Long Term Assets > 1 Year

This reflects any assets, other than Intangible or Fixed, that are not likely to change in the current year. In general this category of asset will cover any deposits made, e.g. a rental deposit for a lease that has more than a year to run, or any loans made by the business that have more than a year left to run.

In the case of a longer term loan made by the business, there will generally be two accounts, one in current assets to reflect the loan payments that will be made in the current year, and one in longer term assets for the repayments that will be made in more than a year’s time.  

Next Week – Liabilities.

Categories: Balance Sheet

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