Balance sheet

A.   Assets

A company's balance sheet gives a 'snapshot photo' of its assets and liabilities at the end of a particular period, usually the 12-month period of its financial year. But the snapshot could be taken on any day of the year.

An asset is something that has value or the power to earn money for a business. These include:

1. current assets:

• cash at the bank
• securities - investments in other companies
• stocks of raw materials, unfinished goods, finished goods that are going to be sold, etc.
• debtors - money owed to the company by customers, not including bad debts that will probably never be paid

2. fixed, tangible or physical assets: Stocks equipment, machinery, buildings and. Land.

3. intangible assets: for example goodwill - the value that the company thinks it has as a functioning organization with its existing customers - and in some cases brands because established brands have the power to earn money, and would have a value for any potential buyer of the company.

Items are carried - shown - on the balance sheet at particular amounts. However, there are some things of value that are never shown on a balance sheet, for example the knowledge and skills of the company's employees.

Note: BrE: stocks; AmE: inventories            

          BrE: debtors; AmE: accounts receivable or receivables

 

B.    Depreciation

Of course, some assets such as machinery and equipment lose their value over time because they wear out and become obsolete. Amounts relating to .this are shown as depreciation or amortization in the accounts. For example, some computer equipment is depreciated or amortized over a very short period, perhaps as short as three years, and a charge for this is shown in the accounts. The value of the equipment is written down or reduced each year over that period and written off completely at the end.

Note: Depreciate and depreciation are usually used in BrE, amortize and amortization in AmE.

The amount that is shown as the value of an asset at a particular time· is its book value. This may or may not be its market value - the amount that it could be sold for at that time. For example, land or buildings may be worth more than shown in the accounts because they have increased in value. Equipment may be worth less than shown in the accounts because its value has not been depreciated by a realistic amount.

Reading Comprehension

1. Complete the assets table for a UK company with expressions from A opposite, and the relevant figures, using the information below. (The other half of this balance sheet is in the next part of the lesson ‘Balance sheet 2’)

• Paradigm has goodwill - in the form of hundreds of satisfied customers - worth an estimated £30 million. This is its only intangible asset.
• It has investments of £12 million in other companies.
• It has raw materials, unfinished goods and finished goods together worth £7 million.
• It owns equipment and machinery with a book value of £18 million.
• It owns land with a book value of £62 million.
• The company has £22 million in its accounts at the bank.
• The company owns offices and factories with a book value of £188 million.
• Various people and organizations, including customers, owe £15 million.

2. Using the information in B opposite and in the table above, decide if these statements about Paradigm's assets are true or false.

The figure for:

1.  cash relates only to banknotes in the safe on the company's premises          …………….

2.  equipment and machinery is the price it was bought for, minus amounts for depreciations      …………

3.  stocks relates only to finished goods waiting to be sold           ……………

4.  land and buildings is the exact amount they could definitely be sold for      ……………….

5.  goodwill is an estimated value that a buyer of the company might or might not agree to pay  ………………….

6.  debtors is a reasonable estimate of how much it will receive from them         …………………..

 

Over to you

Think of a company that you're interested in. What are some of its main assets? Which of them might be shown on its balance sheet?

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Answers

1.     

a. Cash   b. Securities       c. 12        d. Debtors      e. 15       f. Buildings     g. 188        h. Land       

i. 62        j. Goodwill    k. 30

2.  

1. false        2. true             3. false               4. false                5. true                6. true

 

Over to you (sample answer)

Carphone Warehouse is a retailer of mobile phones in the UK. It has a chain of outlets in strategic locations in most UK cities, but most of the sites are rented, and the rented sites do not appear on its balance sheet. It has knowledgeable staff, but employees don't appear either. It has stocks of mobile phones to sell, which do appear, and money in its bank accounts, which also appears on its balance sheet.