chapter 4 finance(3)

THE BALANCE SHEET
Business need to know how much they are worth.To find out,a business can use its balance sheet.This shows it how much it owns against how much it owes .The balance sheet is often called a "snapshot"because it shows the situation at the point at which it was drawn up.The balance sheet for a small business is relatively simple,that for a large business more complex,but the principles are the same.

Some definitions:
assets:anything that a business owns that has a value.
creditors:those to whom the business owns money such as banks
debtors:those who owe the business money,such as other businesses that have yet to pay for goods bought
liabilities:anything that a business owes that has a value

THE ACCOUNT

There are three parts to a balance sheet.Each is linked to the others

1. Assets--what a business owns
2. liabilities --what a business owns
3. capital--where the business has raised in money from

ASSET

Items,are only assets if they can be valued."Reputation",for example,does not appear in a balance sheet.Assets are either fixed(e.g buildings and machinery used in production)or current (e.g stocks of finished product that could be easily turned into cash,or money that is owed to the business by debtors)

LIABILITIES

Items are only liabilities if they can be valued.Liabilities are either current (debts that must be paid back within a year,such as bank overdraft and debts owed to creditors)or long term(debts that the business has more that a year to repay,such as long-term loans and mortgages)

CAPITAL

The final part of the account shows how the money for these net assets employed was raised.This could be via shares,though profit,or from profit made in previous period.Capital must balance with net current assets.

KEY POINT!

fixed assets +current assets =total assets

current liabilities+long-term liabilities=total liabilities

total assets -total liabilities=net assets employed

PROFIT AND LOSS ACCOUNT

THE ACCOUNT

3 parts to the profit and loss account

1. trading account -what the business has sold and what it has cost to achieve these sales.
2. profit and loss account-gross profit minus expenses
3. appropriation account-where the net profit has gone

INCOME

The account shows that what the business has earn.This is called its income.The biggest source of income for most business is sales revenue.However,the cost of buying or marketing the items sold has to be deducted from this total.

STOCK

The only time this is different is if you have stock left over.This is our "opening stock"for the next year.

EXPENSES

Buying and selling the pencils will have taken you time,you may also need somewhere to sell them from .These are all expenses.A bigger business will have to pay items like wages,rent on premises,power bills and equipment costs.

GROSS AND NET PROFIT

Gross profit is the amount that you have made before expenses are taken into account .Net profit is the amount after expenses are deducted.

Appropriation account

What happens to the gross profit.Some of it goes in taxes,some may be given to shareholders in the forms of dividends and some may be kept to help the finances of the business.

KEY POINT!

trading account :

sales revenue-costs of sales=gross profit

profit and loss account:

gross profit -expenses=net profit

appropriation account:

profit after tax-dividends=retained profit

CASH AND CASH FLOW

SOME DEFINITIONS:

budget-a plan of future expenditure

cash-flow crisis-when a business cannot pay its immediate debts

forecast -an estimate;trying to look into the future

CASH FLOW

If there is more cash coming into in than the business needs ,this is called cash surplus,If there is less cash coming than the business needs,it is called cash shortage.Remember that it can be just as bad to have too much cash as to have too little.It is inefficient to have too much.It is better to turn an excess of cash into assets that can earn more money

KEY POINT!

If a business knows when it is going to need cash it can plan to do something about it

1. borrow money
2. increase sales
3. decrease costs
4. persuade people to pay more quickly

THE NEXT BOOKHOLDER IS NARA!!!!!!