• what the business owns and
• what the business owes

What are fixed assets?

Fixed assets are used within the business and are expected to be useful for longer than twelve months. They are usually classified as:

• land and buildings
• plant, machinery and equipment
• fixtures and fittings
• motor vehicles

Current assets are items of cash or items which are expected to be turned into cash within twelve months of the balance sheet date. They are items which are purchased or manufactured for the purposes of resale. Examples include:

• stocks which include raw materials, finished goods and work in progress
• debtors which are amounts owed from customers who have purchased goods from the business on credit terms. This means that customers are allowed to pay for goods and services some time after the point of sale and this delay is normal business practice. There are important implications for controlling the cash coming in from these credit customers.
• bank balance provided the account is in funds
• petty cash

If an asset is used within the business it is a fixed asset. If it is purchased or manufactured for the purposes of resale it is a current asset.

Time to test your understanding

Question one:
What is a computer which is used for maintaining customer details in a computer retail business. Is it a current or fixed asset?
 take a peep at the answer?

Question two:
What is a computer which is purchased for selling purposes?
 take a peep at the answer?

What the business owes

What the business owes can be simply split into three categories:

1) current liabilities
2) long term liabilities
3) capital

What are current liabilities?

Current liabilities are amounts owed to suppliers for goods and services purchased on credit terms and which have to be paid within twelve months of the balance sheet date. They can include:

• trade creditors which are amounts owed to suppliers
• bank overdraft

Long term liabilities are amounts owed which have to be repaid after an interval of time which is longer than twelve months after the balance sheet date. These are called loans and in the case of limited companies are sometimes referred to as debentures.

What is capital?

Capital is made up of capital introduced which is cash and any other assets introduced by the owners.
Capital grows when profits are made and is reduced when assets are withdrawn by the owner. This withdrawal is referred to as drawings unless the business is a limited company in which case it is referred to as a dividend or distribution of profits. There are three major types of business:

• the sole trader has just one owner
• the partnership has more than one partner
• the limited company also has more than one owner but it is subject to the rules and regulations of the companies acts. It is usually a much larger business than the first two types and the financial controls operating to safeguard company assets and accounting records are expected to be much more sophisticated. They come in two flavours; public and private. The public company has many owners and shares can be purchased and sold on the stock exchange. The private company is owned by a small number of shareholders and shares can not be traded publicly on the stock exchange.

	£	£	£
Fixed Assets	Cost	Depre-  ciation	Net Book  Value
Land and Buildings	1,000	50	950
Plant & Machinery	200	40	160
Fixtures & Fittings	300	90	210
Motor Vehicles	400	175	225
	1,900	355	1,545
Current Assets
Stocks	300
Debtors	304
Less Provision for  doubtful debts	(4)
Prepayments	10
Bank and cash	300
Total Current Assets		910
Current Liabilities
Creditors	100
Accruals	20
Overdraft	280
Total Current Liabilities		(400)
Net Current Assets			510
Long Term Liabilities
Loan			(55)
			£2,000
Represented by:
Capital			1,500
+Profits earned:
this year		200
in previous years		1,000	1,200
-Drawings			(700)
			£2,000

You will be able to see that the figure for the bottom section headed "Represented by" is £2,000 which is the same figure for the total of the top section. This is no accident and is always true because of a principle known as the balance sheet equation.
This principle states that:

Fixed assets + current assets - current liabilities - long term liabilities = capital + profits - drawings

1545              +       910            -        400              -        55                      = 1500    + 1200    -  700

Current assets - current liabilities = net current assets
910                   -           400             =            510

This therefore means that :
fixed assets + net current assets - long term loans = capital + profits - drawings
1545              +       510                   -   55                    = 1500    + 1200    - 700

• It tells us that the total for current assets of £910 is much higher than the total for current liabilities of £400. This means that the business is able to pay its debts as they fall due. If all its creditors including the bank required immediate payment the £400 required to pay them could come from £300 from cash and £100 from debtors. The latter would require someone to contact the customers and entice them to pay up. This would require trained  people who are often known as credit controllers.
• It tells us that drawings of £700 is in excess of the profits earned for the year.
• It tells us that Land and buildings is the most valuable asset owned by the business.
• It tells us that at the balance sheet date there was a cash shortage. Can you see where this is disclosed on the balance sheet?

• Net book value = cost - accumulated depreciation
• total current assets = stock + debtors less provisions for doubtful debts + prepayments + bank and cash
• total current liabilities = trade creditors + overdraft
• Net current assets = working capital = total current assets - total current liabilities
• balance sheet totals =
• for the top part = fixed assets + net currents assets - loan
• for the bottom part = capital brought forward from the previous year + profit - drawings
• the top part total is  always the same as the bottom part total.

Answer to question two:
It is a current asset because it is acquired for the purposes of resale.

• a) the shrink wrap machine
• b) £10,000 borrowed by the owner from a friend. the owner has ten years to pay back this loan
• c) a bank current account showing a balance of £4,000
• d) £700 owed by a customer
• e) £800 owed to a supplier
• f) a vacuum cleaner
• g) £6,000 introduced by the owner
• h) a van used for customer deliveries
• i) gift boxes used to wrap the gifts
• j) £60,000 worth of gifts left unsold at the balance sheet date

• definition
• examples
• adding up the figures
• what it means
• rules and regulations
• related words

2) Try your hand at advance tests numbers 3 and 4. You will find these at the bottom of the glossary home page

(C)  BITE study

Examine the BITE software by selecting from the NT front screen:

start, programs, subject specific, business,BITE,module 1.

Change navigation mode to map mode by using the navigation button at the top left of the screen.
Study carefully the activities described in your bite learner guide for week one.
 
 
 
 

Answers

a) the shrink wrap machine is a fixed asset which is used within the business
b) £10,000 borrowed from a friend is a loan and therefore a long term loan
c) a bank account in funds is a current asset
d) £700 owed by a customer is a debtor and therefore a current asset
e)£800 owed to a supplier is a current liability
f) the vacuum cleaner is used within the business and is therefore a fixed asset
g) £6,000 introduced by the owner is capital introduced
h) the van is a fixed asset because it is used within the business
i) boxes used for wrapping gifts are stocks and therefore current assets
j) £60,000 worth of gifts left unsold at the year end are stocks and therefore current assets
 return to question