Balance Sheets

Balance sheets are a key financial statement and learning the layout of these is a key to success in A Level Accounting.  They are a snapshot AT a point in time.  However there is no way you can expect people to remember the layout is there??  There is and it involves Alchemy (magic). 

    Assets – things a business owns

 – Liabilities things a business owes

= Capital – the owners investment

When you make yourself a sandwich you have bread on the top and bottom to hold the filling in.  Being an Accountant I’m a bit odd so I recommend a Non-Current Sandwich!

Bread                 Non Current Assets – usually kept for more than 12 months

Current               Current Assets – to be turned into cash within 12 months

Current               Less Current Liability – to be paid within 12 months

Bread                 Less Non Current Liabilities – do not need to be paid back within 12 months

= Net Assets (assets - liabilities)

You now have most of the key headings in place so it’s a question of deciding what goes where!  This is where practice comes in!

Capital

The Capital section is relatively straightforward: -

Opening Capital – what the business was worth at the start of the year

Add net profit (profit makes the business worth more)

Add capital injections (when the owner puts money in it is worth more)

Less drawings (taking money out makes it worth less)

Closing capital

Key notes to remember

Show all workings – some adjustments are complex and you need to show us how you got to your answer – no workings means you just lost 5 marks (or a full grade) – Easy Marks!

A balance sheet is AT a point in time.  The title is quite often in the question unless it tells you the balance sheet is wrong! An easy mark!

Underline all the key headings and use columns – it is not a shopping list!

Net Current Assets (working capital) – this is the total of your current assets minus the total of your current liabilities.  It goes in just after current liabilities.

Net Current Assets is often worth a mark

Depreciation is taken away from Non Current Assets: – is your car worth more the more you use it?  Of course not!  Easy mark!

Don’t move things around until it balances – you will probably reduce the marks you are getting and waste time!

Final note– get a printed copy of a balance sheet (there is one below if you wish ) and cut it up line by line and then practice putting them in order.  Keep it in an envelope to keep it neat.  If you do this once a day for three/four weeks you will crack it!

Practice past papers – use the ones in your class but also download some from your exam board website!

Key accounting definitions

A defining moment – some key terms of accounting explained

Remember to apply your knowledge to questions & quote figures, details from the questions or give examples to fully demonstrate your knowledge. 

Sales Revenue - The amount of income from selling goods and/or services usually calculated by multiplying quantity sold x selling price

Cost of Sales - The cost of goods actually sold in the current accounting period after adjusting purchases with opening and closing inventory, returns and carriage in

Gross Profit - The amount of profit after taking any direct expenses away from (primary) income of a business

Accrued Expenses - Business costs which are due but unpaid at the end of the current accounting period even though they have been used/consumed.  These will increase expenses in the income statement and increase current liabilities in the balance sheet

Prepaid Expenses - An expense paid for in this accounting period even though it will not be used/consumed until the next accounting period.  Will reduce expenses in the income statement and increase current assets in the balance sheet

Depreciation - Writing off the expense of a non-current asset over its expected lifetime in line with the accruals concept

Non-Current Assets - An asset purchased which is not for resale and was bought to generate future profits for a business.  Usually kept for over 12 months e.g. Buildings

Current Assets - An asset which is expected to be turned into cash within the next 12 months e.g. Inventory

Current Liabilities - The amount of liabilities which need to be paid within the next 12 months e.g. Trade Payables

Non-Current Liabilities - The amount of liabilities which need to be paid back in the long term (i.e. over 12 months) for example Mortgage

Net Current Assets - This shows how much funds a firm has after using its short term assets (Current Assets) to pay off its short term debts (Current Liabilities). A negative figure indicates cash flow problems.

Capital – the amount of the owner’s investment which will be equal to assets minus liabilities

Unpresented Cheques - A cheque written and entered in the cash book that has not yet been processed by the bank and therefore not shown on the bank statement

Outstanding Lodgement - Funds that have been debited in the cash book but have not yet been added to our bank account and therefore not shown on the bank statement

Dishonoured Cheque - A cheque on which payment has been refused payment by the bank usually due to insufficient funds.

Standing Order - A business instructs their bank to make a regular and fixed payment usually in exchange for goods/services provided

Direct Debit – Where authority has been given to a 3^rd party to take funds from their account.  The amount may vary or be fixed and dates which may vary or be fixed

Cheque – A cheque (quote number if possible) is given to a party (you/them) who will then present this to the bank for payment. 

Credit Transfer – Funds have been transferred electronically from one party (name them) into our bank account

Bad Debt – a receivable account which is not expected to be paid.  We therefore reduce the trade receivables and write it off as a bad debt expense.

Remember to apply it to the question wherever possible!

Income Statements

Students of Accounting regularly struggle with Income Statements layouts and its vital this is overcome by you as these are fundamental to your success in.  These can easily be worth a large percentage of the paper.   Here are the key components broken down: -

Revenue

Revenue - this is the amount a firm has sold – this should be a big figure (usually).

Returns in – these are customer returns and are taken off revenue to give a net sales revenue figure

Cost of Sales

This is the tricky bit.  It is not just what you purchased.  You are trying to work out how much the goods you sold actually cost you to buy.  Since an established business is unlikely to start or end a year with no stock you need to adjust things slightly.

If you start off with 10 items, buy 50 more and have 14 left how many have you sold?  Basic maths tells us its 10+50-14= 36 items.  

This is basically what we do in Cost of Sales!  The layout is as follows.

Cost of Sales

Opening inventory

Add purchases

Add Carriage In (the delivery cost inwards is a direct cost of the goods)

Less Returns out (items you sent back to the supplier)

Less closing inventory (this is not included in the cost of sales as its not been sold!)

= Cost of sales

Gross Profit

Net Sales Revenue – Cost of Sales = Gross profit (this is the direct profit made from selling the goods) Then you add any account that ends in the word received – these are classed as secondary incomes to give you a new total

Expenses

The expense part is pretty simple.  You simply put them all down (in any order), add them up and take away from the total you had after adding gross profit to xxxxxx received.  Carriage out is an expense too!  Don’t include drawings, inventory or any non-current assets in the expenses.  You will usually need to depreciate the non-current assets though.

Notes to the accounts

These are the most important part – worth double marks at least!  Remember to change two things – not just one!!

·         Accruals of expenses are added to the expense (as long as these were already included in the expense figure) and also go as a Current Liability in the Balance Sheet

·         Prepayments of expenses are taken from the expense (as long as these were already included in the figures) and also go as a Current Asset in the Balance Sheet

·         Don’t forget to put depreciation in – you will need to work a figure out for the Income Statement.  This will be added to the provision already in place in the balance sheet

·         A bad debt is an expense – but you also reduce trade receivables

·         Closing Inventory is taken off Cost of Sales and put as a Current Asset

·         Any item put in the wrong account – take it out and put it in the right one!

Golden rules

In before out (i.e. ‘returns in’ is always in a section above ‘returns out’.  The same applies to carriage.

Show all workings – some of them will get complicated and working ensure you get marks for what you did right!

Underline key headings

Use columns – it’s not a shopping list!