It is given in two halves - the top half shows where the money is currently being used in the business (the net assets), and the bottom half shows where that money came from (the capital employed). The value of the two halves must be the same - capital employed = net assets, hence the term balance sheet.
The money invested in the business may have been used to buy long-term assets or short-term assets. The long-term assets are known as fixed assets, and help the firm to produce. Examples would be machinery, equipment, computers and so on, none of which actually get used up in the production process. The short-term assets are known as current assets - assets which are used day to day by the firm. The current assets may include cash, stocks and debtors.
The top half of the balance sheet will therefore be made up of the total of the fixed and current assets, less any current or long-term liabilities the firm may have (creditors, loans and so on). It may look as follows:
£ million | ||||
Fixed assets | 200 | |||
Current assets | - stock | 40 | ||
- debtors | 50 | |||
- cash | 20 | |||
TOTAL | 110 | |||
less Current liabilities | (40) | 70 | ||
NET ASSETS | £270m | |||
The bottom half of the balance sheet then looks at where this money came from. This depends on how the business was originally funded. The main source of money for a limited company starting up is the issue of shares. This is termed the share capital - the money the original shareholders put into the business. From then on the assets of the company may be built up by ploughing profit back into the business. This is called retained profit, and is the other source of money usually included in the bottom half of the balance sheet. This may therefore look as follows:
Share capital | 100 | |
Retained profit | 170 | |
CAPITAL EMPLOYED | £270m |
Source:
http://www.bized.co.uk
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