Balance Sheet (Leaving Cert Business): Revision Notes
Balance Sheet
What is a balance sheet?
A balance sheet (also called a statement of financial position) is a crucial financial document that shows a business's financial situation at a specific point in time - typically the last day of the financial year. Think of it as a financial snapshot that reveals two key things:
- What the business owns (its assets)
- How the business is financed (where the money came from)
The balance sheet demonstrates where money invested in the business originated and how it has been spent across different areas of the organisation. This dual perspective helps stakeholders understand both the business's resources and its funding structure.
Structure of a balance sheet
A balance sheet follows a specific format that helps readers understand the financial position clearly. Let's examine each component using Murphy Ltd as an example:
Fixed assets
These are valuable items owned by the business that will be kept and used over extended periods, typically more than one year.
Murphy Ltd - Fixed Assets Breakdown
- Land: €800,000
- Buildings: €600,000
- Vehicles: €200,000
Total Fixed Assets: €1,600,000
Current assets
Current assets represent items of value that are generally held for less than one year. These change frequently as the business operates day-to-day.
Murphy Ltd - Current Assets Breakdown
- Debtors: €25,000 (money owed to the business)
- Cash: €3,000 (money in bank accounts)
- Closing stock: €18,500 (unsold goods)
Total Current Assets: €46,500
Current liabilities/creditors
These are amounts the business owes that must be paid within one year.
Murphy Ltd - Current Liabilities Breakdown
- Creditors: €21,000 (money owed to suppliers)
- Bank overdraft: €15,000 (money owed to the bank)
Total Current Liabilities: €36,000
Working capital calculation
Working Capital Formula
Working capital shows the level of cash available for day-to-day business operations.
Murphy Ltd - Working Capital Calculation
Working Capital = €46,500 - €36,000 = €10,500
Insufficient working capital can lead to serious liquidity problems, making it difficult for businesses to pay wages, purchase stock, or meet other operational objectives.
Total net assets
This represents the total value of everything the business owns after subtracting what it owes:
Murphy Ltd - Total Net Assets Calculation
Total Net Assets = €1,600,000 + €10,500 = €1,610,500
Financed by section
This section shows how the business has been funded, divided into two main categories:
Long-term liabilities/creditors
Money the business owes that will be repaid after more than one year:
- Loans: €350,000
Equity capital
Money invested in the business by its owners:
- Ordinary shares issued: €1,073,450
- Retained earnings: €186,550
- Total Equity Capital: €1,260,000
Murphy Ltd - Capital Employed Calculation
Capital Employed = €350,000 + €1,260,000 = €1,610,000
Capital employed represents the total money invested in the business by owners and/or bankers. It includes long-term capital funding and is composed of issued share capital, profit and loss account balances (revenue reserves), and long-term loans.
Key terminology
Essential Definitions:
- Ordinary share capital: The money owners receive for their shares
- Authorised share capital: The maximum amount of share capital a company can issue to shareholders
- Issued share capital: The total value of shares actually sold to shareholders
Why balance sheets matter
The balance sheet serves as a vital financial tool for several reasons:
Fixed assets information
Knowing the value of fixed assets is beneficial because they can serve as security or collateral when the business needs to obtain loans from financial institutions.
Fixed assets provide tangible security for lenders, as they represent substantial value that can be recovered if the business cannot repay its loans.
Working capital assessment
The working capital figure reveals whether the business has sufficient money available to cover day-to-day expenses such as staff wages, utility bills, and supplier payments.
Positive working capital indicates good liquidity, while negative working capital may signal potential cash flow problems that need immediate attention.
Financing structure analysis
The "financed by" section shows the balance between debt and equity financing, helping stakeholders understand whether the business relies more heavily on loans or shareholder investment.
A good balance between debt and equity financing demonstrates financial stability and reduces risk for both lenders and investors.
Key Points to Remember:
- A balance sheet provides a financial snapshot of a business at a specific point in time
- Working capital = Current assets - Current liabilities, and shows daily operational funding capacity
- Fixed assets can be used as loan security, making their value important for financing decisions
- The balance sheet reveals how a business is funded through the mix of debt and equity
- Total net assets must equal capital employed- the balance sheet must always balance!