Understanding a Balance

Sheet
Basic Principles of a Balance
Sheet
Most businesses borrow money to help them
to operate.
A balance sheet has a special section called
liabilities. This shows how much money has
been borrowed or invested and where it came
from.
The term balance means that all the money
invested or borrowed must be accounted for in
another section, called assets.
What are Assets?
last a long time e.g., buildings, vehicles, computers.
cost a lot of money.
could be sold to increase capital (i.e. money owned
by the business).
Fixed assets are items owned by the company
which:
What are Assets?
Current assets include:
Items used and replaced regularly e.g., raw
materials or stock.
Customers who owe money (called debtors) for
goods they have bought.
Money in the current bank account.
What are Liabilities?
Current liabilities are:

Money the business owes to suppliers (called
creditors) for goods purchased on credit.

Short term loans.
What are Liabilities?
Liabilities also includes capital and reserves.

Share capital is money which shareholders have
invested in the business.
Reserves = profit from previous years which has
been kept to finance future developments.
Profit and loss account = money kept back from
the current years profits.
The structure of a Balance Sheet Assets
Fixed assets
Buildings 60,000
Equipment 20,000
Total fixed assets 80,000

Current assets
Stock 20,000
Debtors 10,000
Cash at bank 10,000
Total current assets 40,000
(Total assets = 120,000 but this figure doesnt show)
The structure of a Balance Sheet Current liabilities
LIABILITIES

Current liabilities
Creditors -10,000

Working Capital 30,000
(This is the current assets - 40,000 - minus the current liabilities)

Total Net Assets 110,000
(This is the total assets - 120,000 - minus the current liabilities)
The structure of a Balance Sheet Capital and Reserves
Financed By:

Accumulated Fund 70,000
Surplus of Income 40,000


Capital Employed 110,000
(This is the total amount in Capital and Reserves. It must equal
the same amount as the total assets minus current liabilities).
Putting it all together
ASSETS
Fixed assets (assets listed)
Total fixed assets
80,000 A
Current assets (assets listed)
Total current assets 40,000 B

LIABILITIES
Current liabilities 10,000 C
Working Capital 30,000 B C
Total Net Assets 110,000 A +B C
Financed By: (all listed)
Capital Employed 110,000 D
Reading a Balance Sheet
Both the balance sheet and the profit and loss
account show the health of the business

Shareholders, customers, suppliers, employees
and other groups of people will be interested in
both types of account.
Key aspects of a Balance Sheet
Fixed assets is there enough money secured
in items which could be sold to raise capital?
Cash in bank is there enough to cover a short-
term crisis?
Working Capital if this figure is negative, the
business hasnt enough money to pay all the
creditors in a reasonable time.
Shareholders funds are these increasing?
Shareholders want their investment to grow.
Contents of Profit and Loss
Account
Revenues : Turnover
Other income
Sale of fixed assets
Expenses
Profit / Loss
Revenues
Revenue is defined as the income that
accrues to the firm by sale of goods and
services or through investments
Sales Revenue is the amount earned
through sale of goods/services
Gross sales is the total sales, while Net
sales is gross sales minus the trade
discounts
Revenue (Contd.)
Other income is earned through other
sources of investments
Examples: Interest, dividend, royalty,
commission, fee, etc
Sale of Fixed Assets are the revenues
which come into the business when
unused / unwanted assets are sold and
money recovered by the company
Expenses
The cost of earning the revenues are the
expenses
Examples: variable expenses like cost of
manufacture, cost of selling, fixed
expenses like salaries, administrative
expenses
Expenses (Contd.)
Cost of goods consumed
This is the value of the inputs used to
manufacture the final product
It is calculated as
Opening stock
+ Purchases
- Closing Stock
Expenses (Contd.)
Manufacturing expenses
These include all expenses related to plant and
manufacturing operations like power and fuel,
repairs and maintenance, stores consumed,
water consumed, etc
Excise Duty
This is the amount paid to the Govt. as a tax,
before the goods are dispatched from the factory

Expenses (Contd.)
Salaries and Wages
These are the cost of labour and other
staff and will also include all other
employee benefits and amenities.
The other benefits include Provident Fund,
ESI contributions, medical benefits, LTC,
bonus, gratuity, pension, other
superannuation benefits, etc
Expenses (Contd.)
Administrative Expenses
These include office expenses, secretarial costs,
postage and telephones, directors remuneration
and other administrative expenses
Selling Expenses
These include freight, advertising and sales
promotion, commissions and discounts and
other selling and distribution costs
Expenses (Contd.)
Interest
The interest costs consist of interest on long
term loans, debentures, bank loans for working
capital, interest on public deposits and other
loans
Depreciation
This represents a non cash expenditure as it is
only an accounting provision. This amount is not
paid to an outside party
Other expenses
This includes auditors remuneration, petty
expenses, donations, etc

Profit / Loss
The difference between the revenue and
expense is profit
When expense exceeds the revenue, the
company ends up with a loss.
PBID: Profit before Interest and
Depreciation
PBT: Profit before Tax
PAT: Profit after Tax
The Profit Appropriations
Profit after Tax (PAT) is available for
appropriations for
Debenture Redemption Reserve
General Reserve
Dividend on Preference Share
Dividend on Equity Share
Profit or Loss carried over
After appropriating the taxes and
dividends, the balance surplus is
transferred to Reserves and Surplus in the
Balance Sheet
The net loss reduces the Reserves and
Surplus in the Balance Sheet
IF CLAUSES: THIRD
CONDITIONAL
Conditional sentences describe situations that
occur (or do not occur) because of certain
conditions.


In conditional sentences, the clauses can come in
either order.We place a comma after the if clause
if it is comes first.We dont generally place a
comma after the result clause if it comes first.
There are five types of if clause:
TYPES OF IF CLAUSE
Type 0
Type 1
Type 2
Type 3
Mixed Type
Type 3
This is the only type of condition which deals
with past situations. The action mentioned
did not really happen.
*** If + past perfect + would have verb3

e.g. If it had rained yesterday, I would have
stayed at home.

Basic structures used in conditional sentences
Situation If Clause Main Clause
True in the present /
future
Simple present Simple present
Simple future
Untrue in the present /
future
Simple past Would + verb 1
Untrue in the past Past perfect Would + have verb 3
EXERCISES

1. If I ___(be) stronger, I'd help you carry the piano.

2. If we'd seen you, we ___(stop).

3.If we ___(meet) him tomorrow, we'll say hello.

4.He would have repaired the car himself if he
___(have) the tools.
5.If you drop the vase, it ___(break).

6.If you hadnt studied, I ___(not pass) the exam.

7.I wouldnt go to school by bus, if I ___(have) a
driving licence.

8.If she ___(not see) him everyday, shed be
lovesick.

Answers: 1)were 2)would have stopped 3)meet 4)had had 5)will
break 6)would not have passed 7)had 8)didnt see
EXERCISES

1. If I ___(be) stronger, I'd help you carry the piano.

2. If we'd seen you, we ___(stop).

3.If we ___(meet) him tomorrow, we'll say hello.

4.He would have repaired the car himself if he
___(have) the tools.
5.If you drop the vase, it ___(break).

6.If you hadnt studied, I ___(not pass) the exam.

7.I wouldnt go to school by bus, if I ___(have) a
driving licence.

8.If she ___(not see) him everyday, shed be
lovesick.

Answers: 1)were 2)would have stopped 3)meet 4)had had 5)will
break 6)would not have passed 7)had 8)didnt see
WISHES
We often use unreal conditionals to
express regret or sadness. In a similar
way, we use wish + noun clause to
express sadness or a desire for different
situation.

e.g. I wish (that) I had a better job.
(If I had a better job, Id earn more.)



a) wish + would / could
To express a wish about the future.

e.g. I wish you would change your mind about
buying that house.
I wish she could visit us.




b) wish + simple past
To express a wish about the present.

e.g. My wife wishes I helped her with the house
work.
I wish I lived in a big city.




** If only has a meaning similar to that of wish. If only
is followed by a noun clause without that.
e.g. I wish (that) I were good at sports.
If only I were good at sports.

** Use simple past after if only to express a wish
about something that is contrary to fact at present.
e.g. If only we werent so busy.

** Use past perfect after if only to express a wish that
something had happened differently in the past.
e.g. If only I hadnt said that.
Be careful!
Dont confuse if only with only if.

e.g. If only Jerry studied more.
( = I wish he would study more.)
Only if Jerry studied more would he have a
chance of passing.
( = This would be the only way for him to
pass.)
Basic Structures Used in Wish Clauses
situation


Subject + wish
main clause
A wish about
the future
would + verb1
A wish about
the present
verb2
A wish about
the past
verb3
c) wish + past perfect
To express a wish about the past.

e.g. My son wishes he hadnt taken that job.
I wish you had told me about the dance.

** If only has a meaning similar to that of wish. If only
is followed by a noun clause without that.
e.g. I wish (that) I were good at sports.
If only I were good at sports.

** Use simple past after if only to express a wish
about something that is contrary to fact at present.
e.g. If only we werent so busy.

** Use past perfect after if only to express a wish that
something had happened differently in the past.
e.g. If only I hadnt said that.
Be careful!
Dont confuse if only with only if.

e.g. If only Jerry studied more.
( = I wish he would study more.)
Only if Jerry studied more would he have a
chance of passing.
( = This would be the only way for him to
pass.)
EXERCISES
1.What a beautiful view! I wish I (bring) ___ my
camera with me.

2.If only Mr. Blake (not, interrupt) ___ the speaker
all the time, the presentation would have been
enjoyable.

3.I quite like this flat, but I wish the people above
us (not, be) ___ so noisy.

4.If only I (have) ___ better eyesight.I cant read
anything now without my glasses.
5.Later on today, I ---- a cake for tea if we---- all of the necessary
ingredients , of course.
A) would bake/were having
B) will bake/have
C) could have baked/had
D) will have baked/have had
E) were to have baked/would have

6.If people ---- any opium-related drug often enough, they ----
physically dependent, or addicted, to the drug.
A) take/become
B) took/became
C) would take/had become
D) were taking/may become
E) are taking/have become


Answers: 1C-2D-3A-4C-5B-6A