CONSTRUCTING FINANCIAL STATEMENTS 71
customer goodwill of a business or its intellectual property, e.g. its ownership of
patents and trademarks.
Current assetsinclude money in the bank,debtors(the sales to customers on
credit, but unpaid) andinventory(the stock of goods bought or manufactured,
but unsold). The wordcurrentin accounting means 12 months, so current assets
are those that will change their form during the next year (see working capital
later in this chapter).
Sometimes assets are acquired or expenses incurred without paying for them
immediately. In doing so, the business incurs liabilities.Liabilitiesare debts
that the businessowes. Liabilities – calledcreditorsin the Balance Sheet – may be
current liabilitiessuch as bank overdrafts, trade creditors (purchases of goods on
credit, but unpaid) and amounts due for taxes etc. As for assets, the word current
means that the liabilities will be repaid within 12 months. Current liabilities also
form part of working capital.
Long-term liabilitiesor creditors due after more than one year cover loans
to finance the business that are repayable after 12 months and certain kinds of
provisions (see later in this chapter).Capitalis a particular kind of liability, as it is
the money invested by the owners in the business. As mentioned above, capital is
increased by the retained profits of the business (the profit after paying interest,
tax and dividends).
The Balance Sheet will typically appear as in Table 6.3. In the Balance Sheet, the
assets must agree with the total of liabilities and capital, because what the business
owns is represented by what it owes to outsiders (liabilities) and to the owners
Table 6.3 Balance Sheet
Fixed assets 1,150,000Current assets
Debtors 300,000
Stock 200,000500,000Less: creditors due within one year
Creditors 300,000
Bank overdraft 50,000350,000Net current assets 150,000Total assets less current liabilities 1,300,000
Less: creditors due after one year
Long-term loans 300,000Total net assets 1,000,000Capital and reserves 1,000,000