Accounting for Managers: Interpreting accounting information for decision-making

30 ACCOUNTING FOR MANAGERS

Table 3.4 Balance Sheet

Assets Liabilities

Equipment 25,000 Creditors 6,000

Inventory 11,000 Capital –

Debtors 5,000 Owner’s original investment 50,000

Bank 16,000 Plus profit for period 1,000

Total capital 51,000

Total assets 57,000 Total liabilities plus capital 57,000

The Balance Sheet lists the assets and liabilities of the business, as shown in
Table 3.4.
The Balance Sheet mustbalance, i.e. assets are equal to liabilities. Although
shown separately, capital is a type of liability as it is owed by the business to its
owners. The double-entry system records the profit earned by the business as an
addition to the owner’s investment in the business:

assets=liabilities+capital

This is called theaccounting equation. However, a more common presentation of
the Balance Sheet is in a vertical format, as follows:

Assets:

Equipment 25,000

Inventory 11,000

Debtors 5,000

Bank 16,000

57,000

Less liabilities:

Creditors 6,000

51,000

Capital:

Owner’s original investment 50,000

Plus profit for period 1,000

51,000

The accounting equation can therefore be restated as:

capital (£51,000)=assets (£57,000)−liabilities (£6,000)

There are some important points to note about the above example:

1 The purchase of equipment of £25,000 has not affected profit (although we will
consider depreciation in Chapter 6).