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Balance Sheet Part 1 Notes

Accounting Notes > Accounting (Special Edition) Notes

This is an extract of our Balance Sheet Part 1 document, which we sell as part of our Accounting (Special Edition) Notes collection written by the top tier of Acca students.

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Balance Sheet - Part 1

Definition A balance sheet is a financial statement of an organisation which shows the financial position of the organisation on a particular date. In other words The balance sheet also known as statement of financial position shows the position of the business at one point in time. The top half of the balance sheet shows the assets of the business and the bottom half of the balance sheet shows the capital and liabilities of the business.

Why is it important?
It is a very important financial statement for the stakeholders (investors, managers, banks etc.) of the business, they want to know the financial position of the business, balance sheet provides all relevant information to the users so that they will take their future decisions accordingly. Lecture Notes Components of the statement of financial position

1. Assets

2. Liabilities (explained in part 2 of this lesson)

3. Equity (explained in part 2 of this lesson) Assets Assets are the resources controlled by an entity, on the balance sheet they are composed of:
* Current assets
* Non current assets (long lived assets) Current Assets - Are those assets which are used within one year
* Cash - local currency of the company

Debtors/ Accounts receivable - The money that is owed to the company for the goods or services provided to customers on credit. Debtors are shown on the balance sheet after deducting an allowance for bad debts..


Notes receivable - Similar to debtors but it is supported by more official documentation such as a "promissory notes"


Inventory - These are raw materials, work in progress and finished goods ready for sale.


Prepaid expenses - These are payments that have made in advance for services to receive in the near future.e.g prepaid rent, advertisement.

Long Lived Assets / Non current assets - These are assets used for more than one year. These are:

Investments - These are investments by the company for more than one year. It contains bonds, shares, debentures etc. These investments are shown at their historical cost or market value on the balance sheet.


Tangibles- These are physical assets that have a useful life of more than a year. This includes Land, buildings, machines, equipments, vehicles etc.
*All the tangibles are valued at historical cost less depreciation except land, land is not depreciated


Intangible assets - Assets that can not be touch by physical hands such as brands, franchises, copyrights, logos, goodwill.

The identifiable intangible asset have a finite period of life, and its value is amortized over its useful life. An unidentifiable intangible asset are those with an infinite life. These assets are not amortized, and are tested for impairment annually. Research and development costs are expensed as incurred under U.S. GAAP. Under IFRS, a firm must identify if the R&D cost is in the research and development stage. Costs are expensed in the research stage and capitalized during the development stage.

Liabilities These are the obligations of the entity which will result in an outflow of economic benefits from the entity. Liabilities can be further classified into current and noncurrent. Working Capital The capital of a business that is used in its daily operations Formula: Working Capital = current assets - current liabilities Financial Instruments Financial instruments contains both financial assets (shares, bonds) & liabilities such as derivatives.
* these are explained in detail in the part 2 of this lesson Equity Equity is the difference between total assets and total liabilities, commonly known as shareholders equity or owners capital.

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