|The terms are described in the order in which they appear on the
balance sheet of the technology company shown above.
Current Assets - These are assets that are already
cash or are expected to be turned into cash within the following
The most common current assets are stock, trade debtors (customers
who owe money for goods and services) and cash itself. The current
assets circulate within a business. Cash is used to purchase stock
which is then sold on credit. When the trade debtors pay, the business
receives extra cash and so the cycle continues.
Prepayments are discussed below in the context of ‘accrued
Most balance sheets also contain miscellaneous other current assets.
Tangible Fixed Assets - The tangible fixed assets
have an underlying physical substance. They are shown in the balance
sheet at their net book value i.e. after taking into account the
‘wear and tear’ (depreciation) that has affected the
asset since it was first purchased.
Investments - These are often investments in an
associated company. An associate is where one company owns 20% or
more (but not more than 50%) of the voting shares in another company.
Goodwill - Assets that do not have an underlying
physical substance - intangible assets - also sometimes appear on
a balance sheet. Examples include patents, licenses, brand names
and goodwill. Goodwill arises when one business purchases another
and pays more than the value of the individual net assets acquired.
The excess price paid is justified because it represents the intangibles
over and above the acquired company’s asset base such as workforce
skills, reputation, customer loyalty etc. These items are normally
excluded from the balance sheet because they are so difficult to
Total Assets - The sum of current assets and fixed
assets. This is the total size of the balance sheet.
Creditors Due within One Year - These are amounts
due for payment to outside parties within the next year and include
bank loans/overdrafts, amounts due to suppliers (trade creditors),
tax payments and dividends due to shareholders.
Accrued Expenses - This relates to the accruals,
or matching, concept which is the principle that revenues and expenses
should be recognised in the period in which they are incurred, irrespective
of the time of the cash transaction. Thus, for example, a charge
would be recorded for the cost of gas in December, even though the
quarterly bill for payment might not arrive until February. In this
situation an accrued expense is shown on the balance sheet.
Sometimes expenses will be paid for in advance, in which case a
prepayment is shown in current assets.
Creditors due after One Year - Creditors due after
one year refer principally to the long-term loans or finance leases
extended to a company. The portion of long-term debt that is due
for repayment within the next year is shown as part of creditors
due within one year.
Some companies (but not the technology company above) also have
provisions as part of their long-term liabilities. These are amounts
set aside for costs which are expected to arise in the future.
Net Assets - Net assets are shown when the balance
sheet is displayed in the vertical format. Net assets are total
assets less total liabilities (total liabilities = creditors due
within one year and creditors due after one year).
Equity Shareholders’ Funds - These are the
amounts which ultimately belong to the shareholders and consist
of share capital, retained profits and other reserves. All are described
Share Capital and Share Premium - Shares represent
the basic units of ownership of a business. Companies issue ordinary
shares which carry one vote each and an equal right to a proportionate
share of dividends. A company can issue shares up to the number
that has been ‘authorised’ by the shareholders.
Ordinary shares have a par or nominal value. The technology company
above has an authorised share capital of 28,480,000 shares of which
23,853,086 have been issued. By multiplying together the par value
(12.5p) and the number of shares in issue we can determine the value
of the share capital (£2.982 million)
Shares are usually issued at a value considerably in excess of the
par value. For a listed company, the shares will be issued close
to their market value – i.e. the price at which they are quoted
on the stock exchange. This may be, say, 300p. When a company issues
shares at a price above the nominal value the difference between
the issue price and the par value multiplied by the number of new
shares issued is added to the share premium account. The share premium
is shown separately in the shareholders’ funds.
Reserves - The reserves consist of the share premium
account, the retained profits (profit and loss account) and any
revaluation reserve. A revaluation reserve will result from any
revaluation of the fixed assets of the company, likely to be land
Company law distinguishes between that part of the shareholders’
claim that can be withdrawn and that which may not. The revenue
reserves are available for dividends and include the retained profits
and the realised profits from the sale of fixed assets. The capital
reserves – share premium and revaluation reserve – together
with the share capital are non-withdrawable.