BUS170

INTRODUCTION TO ACCOUNTING AND FINANCE FOR

BUSINESS
LECTURE 2 WEEK 2

Reporting Financial
Position: The Balance Sheet

Dr Androniki Triantafylli
Reader in Accounting

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LEARNING OUTCOMES
You should be able to:

Explain the nature and purpose of the three

major financial statements

Prepare a simple statement of financial position

and interpret the information that it contains

Discuss the accounting conventions underpinning

the statement of financial position

Discuss the uses and limitations of the statement of

financial position for decision-making purposes
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The major financial statements – an overview

Statement of cash flows

Income statement

Statement of financial position

 The Major Financial Statements

• The Statement of Cash Flow – what cash movements

(cash in and cash out) took place over period

• The Statement of Profit and Loss – how much profit (or

loss) was generated over period. Profit is the increase in
wealth arising from trading activities.

• The Statement of Financial Position – Shows the

accumulated wealth of the business at the end of the period and

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 The Statement of Financial Position: The
Balance Sheet
•
• Shows the financial position of a business at a particular moment in time – a
“snapshot”

• It sets out the forms in which the wealth of the business is held

• It sets out the assets of the business and the liabilities against the business

• The statement of financial position always balances

• The account form of balance sheet lists the assets on the left and the liabilities and
owner’s equity on the right— horizontal format

• The report form of balance sheet presents the liabilities and owner’s equity
sections below the assets section – vertical format (most common)

• A balance sheet is a list of the assets, liabilities, and owner’s equity at a specific
date.

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 Assets
• An asset is a resource held by a business at a particular moment

• Assets can be categorised as current or non-current

• – Current Assets - assets held for a short-term

• For example, inventories, trade debtors and cash etc

• Debtors are amounts owing from customers which will eventually result in the receipt of cash

• – Non-current (or fixed) assets are assets held for a long-term

• For example, property, plant and equipment etc

• Assets do not have to be physical items

• – Assets that have a physical substance (can be touched) are referred to as Tangible Assets

• For example, Inventories, property, plant and equipment etc

• – Assets that do not have a physical substance (cannot be touched) are referred to as Intangible Assets

• For example, goodwill and brands, patents, copyrights and trademarks etc

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Decision chart Is there a probable future No

for identifying an benefit?
accounting
asset Yes

Does the economic benefit arise from

No
a past transaction or event?

Yes

Is there a right to control No

the resource?

Yes

Can the resource be reliably

No
measured in financial terms?

Yes

Not an accounting
Accounting
asset
asset
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The classification of assets

The classification of assets may

vary according to the nature of
the business:

Current assets

Non-current assets
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Current assets

Held for sale or consumption during the

business’s operating cycle

Expected to be sold within

the next year

Held principally for trading

They are cash or near equivalents

to cash
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Non-current assets

Do not meet the definition of

current assets
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Claims

Equity

Liabilities
 Liabilities
• Liabilities are claims on the business by outsiders.

• A claim is an obligation by the business to provide cash, or some other sort of benefit, to an
outside party.

• Liabilities can be categorised as

• – Current Liabilities

• Liabilities held for trading or settled within 12 months

• For example, trade creditors, overdrafts, short-term loans

• Creditors are amounts owing in respect of goods and services previously received

• – Non-current Liabilities

• Liabilities held for more than a reporting year

• • For example, long-term loans, long term creditors

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The classification of claims

Current liabilities

Non-current liabilities
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Current liabilities

Expected to be settled within the

business’s normal operating cycle

Held principally for trading

purposes

Due to be settled within a year after

the statement of financial position
date

No right to defer settlement beyond a

year after the statement of financial
position date
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Non-current liabilities

Do not meet the definition of

current liabilities
 Owner’s Equity or Capital

• The capital of a business is the amount that the

business owes back to the owner of the business
(usually the investment)

• Remember that the business and the owner are

separate legal entities for accounting purposes

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The accounting equation

Assets = Equity + Liabilities

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The equation for the standard layout

Non- Non-
+ Current + +
current assets
= Equity current
Current
liabilities
assets liabilities
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Brie Manufactoring
Statement of financial position as at 31 December 2020

£000

ASSETS

Non-current assets

Property 45

Plant and equipment 30

Motor vans 19

94

Current assets

Inventories 23

Trade receivables 18

Cash at bank 12

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Brie Manufactoring
Statement of financial position as at 31 December 2020 (continued)

£000

EQUITY AND LIABILITIES

Equity 60

Non-current liabilities

Long-term borrowings 50

Current liabilities

Trade payables 37

Total equity and liabilities 147

 Example 1

• Day 1 Avon commences in business introducing £1,000 cash

• Day 2 Buys a motor car for £400 cash

• Day 3 Buys stock for £200 cash

• Day 4 Buys stock for £400 on credit

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 Transactions treatment
• Day 1 Avon commences in business introducing
£1,000 cash

• Cash (current asset) increases by £1,000

• Equity increases by £1,000

• Remember the accounting equation needs to always

hold!

• ASSETS= EQUITY + LIABILITIES

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 Transactions Treatment
(cont.)
• Day 2 Buys a motor car for £400 cash

• Cars (fixed asset) increases by £400

• Cash (current asset) decreases by £400

• Remember the accounting equation needs to always

hold!

• ASSETS= EQUITY + LIABILITIES

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 Transactions Treatment
• Day 3 Buys stock for £200 cash

• Stock (Inventories/ Current asset) increases £200

• Cash (Current asset) decreases by £200

• Remember the accounting equation needs to always

hold!

• ASSETS= EQUITY + LIABILITIES

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 Transactions Treatment
• Day 4 Buys stock for £400 on credit

• Stock (Inventories/ current assets) increase by £400

• Liabilities (Trade Payables) increase by £400

• Remember the accounting equation needs to always

hold!

• ASSETS= EQUITY + LIABILITIES

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Accounting conventions influencing the statement of financial position

Business Statement of Dual aspect

entity financial convention
convention position

Historic Going
Prudence
cost concern
convention
convention convention
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Uses of the statement of financial position

Shows how the business is financed

and how funds are deployed

Can provide a basis for assessing the

value of the business

Relationships between assets and

claims can be assessed

Performance can be better assessed

 SUMMARY

• Statement of Financial Position

• Accounting Conventions

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Do you have any questions? Please e-mail me :
[email protected]

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