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3.4 Final Accounts (Balance sheet (Fixed assets
examples: land, buildings…
3.4 Final Accounts
Balance sheet
Fixed assets
examples: land, buildings, vehicles and machinery (tangible assets as they have a physical existence and are expected to be retained and used by the business for more than 12 months. Businesses can also own intangible assets - these cannot be seen but still have value in the business
Current liabilities
this include accounts payable (suppliers who have allowed the busines credit), bank overdraft and unpaid dividends and unpaid tax
Current assets
examples: inventories (stocks), accounts payable (debtors who have bought goods on credit) and cash/bank balance
Working capital - formula (current assets - current liabilities). can also be referred to as net current assets.
Shareholders' equity - sometimes referred to as sharehoders' funds. It represents the capital originally paid into the business when the shareholders bought shares (share capital) or the retained earnings/profits of the business that the shareholders have accepted should be kept in the business. These also known as reserves.
Shareholders' equity is the permanent capital of the business - it will not be repaid to shareholders (unless the company ceases trading altogether), unlike loans that are repaid to creditors
Non-current (long term) liabilities - long-term loans owed by the business. They are due to be paid over a period of time greater than one year and include loans, commercial mortgages and debentures. The value of non-current assers compared to the total capital employed by the business is a very important measure of the degree of risk being taken by the company's management
Intangible assets - conclusion
- Balance sheets prepared under normally accepted accounting rules do not usually record these assets - often known as intellectual property (unless acquired through takeover or merger)
intellectual property - an intangible asset that has been developed from human ideas and knowledge
- The market value of companies with many intangible assets will be much greater thn the balance sheet or book value.
market value - the estimated total value of a company if it were taken over
Depreciation of assets
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Calculating depreciation
Straight-line method of depreciation
annual depreciation charge = (original or historic cost of asset - expected residual value) / (expected useful life of asset (years)
Advantages:
- It is easy to calculate and udnerstand. It is widely used by limited companies.
Limitations:
- It requires estimates to be made regarding both life expectancy and residual value. Mistakes at this stage will lead to inaccurate depreciation charges being calculated.
- Cars, trucks and computers are examples of assets that tend to depreciate much more quickly in the first and second years than in subsequent years. This is not reflected in the straight-line method calculation - all annual depreciation charges are the same.
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