Y5 T1 Fairman Acc. Chapter 5.ppt

STATEMENT OF FINANCIAL POSITION The balance sheet is a statement of the financial position of the business at a specified point in time. It is important to establish when reading a balance sheet the date it was drawn up; hence, it is important to display the date prominently in the heading. THE ACCOUNTING EQUATION Assets = Liabilities + Owners’ Equity THE CLASSIFICATION OF ASSETS Assets are normally categorised as either current (short-term) or non-current (long-term). Current assets: are not held on a continuing basis include cash and other assets expected to be consumed or converted into cash within the operating cycle (usually within 1 year) CLASSIFICATION OF ASSETS continued Non-current assets: held for the purpose of generating wealth, rather than for resale may be seen as the tools of the business normally held on a continuing basis for a minimum period of one year include intangible assets (like goodwill) CLASSIFICATION OF LIABILITIES Liabilities are normally categorised as either current or non-current. Current liabilities: amounts due for repayment to outside parties within 12 months of the statement of financial position date Non-current liabilities: those amounts due to other parties which are not liable for repayment within the next 12 months only the period for which the liability is outstanding matters - not the purpose it is held for LIQUIDITY In addition to being classified as current or non-currents, assets and liabilities are also listed on the balance sheet in order of decreasing liquidity. Liquidity refers to how quickly an asset or liability can be converted to cash. EXAMPLE PROBLEM #32 - 5 Which asset is listed first at the top of the asset section of the balance sheet? Why? CLASSIFICATION OF OWNERS’ EQUITY Owners’ equity is normally classified into three separate categories: Owners’ equity contributed (share capital) Reserves Retained profit Note: Sometimes, (2) and (3) are categorized into “Reserves” with sub-ca