Accounting Business Reporting for Decision Making

160 Accounting: Business Reporting for Decision Making

The assets of the business as at 30 September 2016 are $87 770. The external claims on the assets at

this date, the liabilities, are $51 400 and the equity, the internal claim on the entity’s assets, is $36 370.

Thus, the assets ($87 770) equal the liabilities ($51 400) plus the equity ($36 370). Net assets refers to

the assets less the liabilities. As assets less liabilities equals equity, net assets equals equity. For ATC, the

net assets are $36 370, representing the assets of $87 770 less the liabilities of $51 400.

ILLUSTRATIVE EXAMPLE 5.1

A balance sheet

Advantage Tennis Coaching (ATC)

Balance sheet as at 30 September 2016

Assets

Current assets

Cash

Accounts receivable

$71 270

6 800 $78 070

Non-current assets

Office furniture

Office equipment

3 200

6 500 9 700

Total assets $87 770

Liabilities

Current liabilities

Accounts payable 1 400

Non-current liabilities

Loan 50 000

Total liabilities 51 400

Net assets $36 370

Owner’s equity

Capital — N Cash

Profit

20 000

16 370

Total equity $36 370

Analysing a balance sheet enables users to make a preliminary assessment as to the financial position of

the entity. For example, ATC commenced the business with an investment of $20 000. As at 30 September

2016, Nicholas Cash has invested in some office furniture and equipment only. ATC has $71 270 cash in

the bank and is unlikely to face liquidity issues in the short term. As the business grows, the investment and

finance decisions will be reflected on the balance sheet. For example, if ATC purchases ball machines and

uses cash to finance the acquisitions, the cash balance will reduce and ball machines will appear as assets

of ATC. Alternatively, if ATC purchases a mini bus to transport junior players to tennis tournaments the

acquisition may be financed by a loan. In that case, assets of ATC will increase and liabilities will increase.

By reviewing the balance sheet, a user may make a preliminary assessment of the economic condition of

the entity by identifying the types of assets in which the entity invests and the entity’s use of liabilities

relative to equity to finance the assets, by appreciating the types and terms of liabilities used to finance the

assets and the sources of equity used to fund assets, and by assessing the entity’s financial solvency.

To further illustrate the information a user can obtain from a cursory glance at a balance sheet,

consider the balance sheet for Coconut Plantations Pty Limited, shown in figure 5.1. This private

company was incorporated in August 2016 and commenced operations in September 2016. As at

31 December 2016, the company has $359 210 in assets. These were financed by $69 000 of liabilities

and $290 210 of equity, indicating the company relies more on equity than debt to finance its assets.