SECTION 2: THE CLASSIFIED BALANCE SHEET

Students should be able to:

1. Give examples of different types of assets and liabilities.
2. Use the Balance Sheet/Accounting equation.
3. Explain the concept of a Balance Sheet.
4. dentify the components of a Balance Sheet.
5. !onstruct a simple Balance Sheet.
6. !onstruct classified Balance Sheets.
7. "etermine #hich items in a Balance Sheet #ill change as a result of various transactions.
Assets , Liabilities and Owners Equity (Capital)
Assets $ are things that a company owns and are sometimes referred to as the resources of the
company.
%iabilities $ are debts or obligations owed by one entity to another entity payable in money&
goods& or services.
!apital/'#ners Equity $ money invested in a business by its o#ners (it is the o#ners) share of a
business*
case study +
Anna has ,-... she #ants to open a shop buying and selling ice cream.
She /urchased ice cream . !ups cones& nap0ins& spoons for her businesses valued ,+...
paying #ith cash
She /urchased a 1efrigerator on credit from AB! %2" valued at ,3...
4uestion $ Can you identify her assets liabilities and owner's equity?
She invested ( started #ith*,-... in the businesses............. 5'#ners Equity/!apital6
She is opening an ice cream shop so the purchases of things she #ould later resell are #hat #e
call inventory or stoc0. 5Assets( they are owned by the business) }
She then purchased a refrigerator for use in the business but it #ould be paid for at a later date
She now owns the refrigerator so it is an asset
She also owes ABC ltd for it so they are her liabilities
7. She has ,7... remaining from the amount she started #ith 55000 000 ! "000 ( A #ash
balan#e of $"000)}
2herefore
Assets (All the things that is owned by the business)
nventory (stoc0* ,+...
1efrigerator ,3...
!ash ,7...
%iabilities 8!reditor9 (All the things owed by the business to an outside %arty) $ AB! ltd ,3...
'#ners equity/ !apital (&he 'oney or other ite's brought into the business by the owner) 2he
,-... invested into the business bu the o#ner.
Accounts /ayable (Creditors* $ A person or company to #hom money is o#e to by the business&
creditors are liabilities of the business.
Accounts 1eceivable ((ebtors*$ A person or company that o#es money to the business& debtors are
Assets of the business .
nventory (Sto#)* $ Goods a businesses holds #ith the intention to resell
The Accounting Equation
s a mathematical expression used to describe the relationship bet#een the assets& liabilities and
o#ners equity of a business . 2he accounting equation states that Assets ! *iabilities + ,wners -quity
%ets loo0 again at Anna and her ice cream shop (Case study 1)
Assets : nventory ,+ ...
1efrigerator ,3 ...
!ash ,7 ...
2otal assets ,+; ...
%iabilities 8!reditor9 AB! ltd ,3...
'#ners equity/ !apital ,-...
s this true for Anna)s business <
s her Assets = %iabilities > '#ners Equity <
Assets = %iabilities > '#ners Equity
,+; ... = ,3... > ,-...
2he Accounting Equation can also be #ritten
!apital = Assets : %iabilities 5,-... = ,+; ... $ ,3...6
%iabilities = Assets : !apital 5,3... = ,+;... $ ,-...6
The Balance Sheet
s a statement of the financial position of a business& it sho#s the assets& liabilities and o#ner)s equity
as at a specific date(usually the end of its financial year*.
Co!onents o" the Balance Sheet
As stated earlier #e said that the balance sheet sho#s ?$
2he Asset
2he %iabilities
'#ners equity
As at a certain date
The Classi"ied Balance Sheet
2o group or place the items in the balance sheet into categories. Assets are grouped into fixed and
current& liabilities #ould be grouped into long$term and current. @or all our examples& the balance
sheets are classified.
The Assets
2here are t#o types of assets?$
+. @ixed assets
A. !urrent Assets
1emembering that assets are things that a company owns and are sometimes referred to as the
resources of the company. 2here are t#o types of assets& fixed and current.
#i$ed Assets (or long tern assets* are all items o#ned by the business and is used in the day to
day business function& fixed assets are not expected to be consumed or turned into cash in less
than one year . Examples of fixed assets are %and& Building& Botor Cehicles& Equipment
Current Assets (or short term assets* are those items o#ned by the business and is used in the
day to day business function& current assets are constantly flo#ing in and out of the business
and is expected to be converted into cash #ithin one year . Examples of current assets are
Accounts receivables (debtors*& nventory& !ash (both in hand and in the ban0*
The Liabilities
2here are t#o types of liabilities?$
+. %ong$term liabilities
A. !urrent Assets
1emembering that liabilities are debts or obligations owed by one entity to another entity payable in
money& goods& or services. 2here are t#o types of liabilities %ong $term liabilities and current liabilities
%ong 2erm %iabilities are those obligations #hich become due and must be repaid in a period
more than one year. Examples of %ong$term liabilities are %ong$term loans and Bortgage
payable.
!urrent %iabilities are those obligations #hich become due and must be repaid #ithin a year.
Examples of current liabilities are Accounts /ayable (creditors*& Short$term loans& Ban0
overdrafts.
The %eading
2he balance sheet must al#ays be correctly headed& included in the heading is $
1. 2he business name
2. 2he name of he statement ?$Balance sheet
3. 2he date of the statement?$2he balance sheet must be dated as at as certain date(the date #ould
al#ays be given*
Balance sheet "orats
2he balance sheet has t#o formats the .erti#al for'at and the hori/ontal for'at& De #ould prepare the
horiEontal format first.
Classi"ied Balance Sheet:' 0erti#al for'at
2he vertical format #ould be discussed in more detail in Section (&
Classi"ied Balance Sheet:' 1ori/ontal 2or'at
2his layout reflects the accounting equation #hich states that Assets = !apital > liabilities #ith the
asset on the left and capital and liabilities on the right.
)*+ Liited
Balance Sheet as at ,eceber -. /011
debit side ("r* credit side (!r*
Asset
#i$ed Assets
%and and Buildings
'ffice @urniture
!omputers
Current Assets
"ebtors
nventory
!ash in ban0
!ash in hand
2
+.. ...
-. ...
A- ...
+. ...
- ...
A ...
-..
,
+F- ...
+F-..

+GA -..
Ca!ital and Liabilities
Ca!ital
Long'ter liabilities
%ong term loans
Current liabilities
!reditors
ban0 overdraft
short term loan
2
+H ...
+ -..
+ ...
2
+A7 ...
-. ...
+3 -..

+GA -.
2he Ieading
%eft hand side is called the
"ebit side& all assets are
listed on this
1ight hand side is called the
!redit side all liabilities and
capital are listed on this side
2otal of debit and credit
must be equal
%ets loo0 again at Anna)s ice cream shop (Case study 1) #e can prepare her balance sheet as at the
start of her financial year January +
st
A.+7.
%ets loo0 again at Anna and her ice cream shop (Case study 1)
Assets : nventory ,+ ...
1efrigerator ,3 ...
!ash ,7 ...
2otal assets ,+; ...
%iabilities 8!reditor9 AB! ltd ,3...
'#ners equity/ !apital : ,-...
Kote ?$
11 Ieading #ith the name of the company& the name of the statement(balan#e sheet* & the
date(as at date given in the question*
11 De #ould be starting #ith the debit ("1* side but you can start either side.
'n the debit side #e are placing all the assets& do not list all assets & only list the ones given in the
question. Anna)s assets are?$
nventory.....Current Asset
Equipment(3efrigerator*.......2i4ed Asset
!ash.........Current Assets
@irst #e #ill list the @ixed Assets5 then the !urrent Assets.
11 Ko# the credit (!1* side & list the !apital and liabilities. As #e can see this example
only has one liability : !reditors& list the long term liability but put a . in the , column.
11 2otal assets should al#ays be equal to capital > total liabilities. Accounting Equation?$
8ASSE2S = !A/2A% > %AB%2ES9
Classi"ied Balance Sheet:' 1ori/ontal 2or'at
Anna3s 4ce crea sho!
Balance Sheet as at 5anuary .
st
/0.6
,r Cr
, , , ,
Asset Ca!ital and Liabilities
@ixed Asset !apital - ...
Equipment 3 ...
%ong term liability .
!urrent Assets
nventory + ... !urrent liability
!ash 7 ... !reditors 3 ...
- ...
+; ... +; ...
Kote A
Kote +
Kote ;
Kote 7 Kote 7 A balanced& Balance Sheet
The Balance Sheet 7 Order o" Listing
Assets and %iabilities can be listed in the follo#ing order?$
(a* permanence
(b* liquidity.
Assets
liquidity refers to ha# fast assets can be converted into cash&therefor cash #ould be the most
liquid asset
permanence refers to the difficulty #ith #hich an asset can be turned into cash.
%iabilities
liquidity refers to ho# fast an obligation or debt becomes due.
2he longer an obligation or debt ta0es to becomes due the more permanent the liability.
!lassified Balance Sheet $Order of liquidity
)*+ Liited
Balance Sheet as at ,eceber -. /011
debit side ("r* credit side (!r*
Assets
!urrent Assets
!ash in hand
!ash in ban0
"ebtors
nventory
@ixed Assets
!omputers
Botor Cehicles
%and and Buildings
2
-..
- ...
+. ...
A ...
A- ...
-. ...
+.. ...
,
+F-..
+F- ...

+GA -..
Ca!ital and Liabilities
!urrent liabilities
Ban0 overdraft
Short term loan
!reditors
%ong$term liabilities
%ong term loans
!apital
2
+ ...
+ -..
+H ...

2
+3 -..
-. ...
+A7 ...

+GA -..
!lassified Balance Sheet $Order of Permanence
)*+ Liited
Balance Sheet as at ,eceber -. /011
debit side ("r* credit side (!r*
Assets
@ixed Assets
%and and Buildings
Botor Cehicles
!omputers
!urrent Assets
nventory
"ebtors
!ash in ban0
!ash in hand
2
+.. ...
-. ...
A- ...
A ...
+. ...
- ...
-..
,
+F-...
+F- ..

+GA -..
Ca!ital and Liabilities
!apital
%ong$term liabilities
%ong term loans
!urrent liabilities
!reditors
Short term loan
Ban0 overdraft
2
+H ...
+ -..
+ ...
2
+A7 ...
-. ...
+3 -..

+GA -..