Chapter 3 • Financial statements and their interpretation
Jackson plc
Balance sheet as at 31 December 2008
Cost Depreciation
£ million £ million £ million
Assets
Non-current assets
Freehold land 550 – 550
Plant and machinery 253 (226) 27
Motor vehicles 102 (56) 46
905 (282) 623
Current assets
Inventories 43
Trade receivables (debtors) 96
Prepaid expenses 12
Cash 25
176
Total assets 799Equity and liabilities
Equity
Ordinary share capital – 200 million shares of £1 each 200
Retained profit 209
409
Non-current liabilities
10% secured loan notes 300
Current liabilities
Trade payables (creditors) 45
Accrued expenses 18
Taxation 27
90
Total equity and liabilities 799This balance sheet tells us that the wealth of the business is £799 million. This is
made up of non-current assets of £623 million and current assets of £176 million. The
business has obligations to transfer part of this wealth to outside groups: £90 million
is in respect of obligations that relate to day-to-day trading and are likely to be short
term; £300 million is in respect of longer-term obligations not directly related to trading.
The distinction between non-current and current assets is broadly concerned with
the intended use of those assets. Non-current assets are those that business intends to
use internally to help to generate wealth, not to be sold at a profit. Current assets are
those that are acquired with the intention of turning them over in the normal course
of trading. A particular non-current asset might be sold at a profit but this would not
mean that it should have been treated as a current asset, provided that the primary
reason for buying it was for using rather than selling it. Non-current assets can be seen
as the tools of the business. Non-current assets were formerly known as fixed assets.
Depreciation recognises that certain non-current assets are not worth as much at the
end of their life with the business as they cost at the beginning and, therefore, that
some part of the business’s wealth will be lost. This is why depreciation appears in the
income statement as an expense, and why the balance sheet value of depreciating non-
current assets is reduced below cost. The total amount of depreciation of a particular
asset is calculated by taking its cost and deducting its estimated disposal value at the
end of its life with the business. This total must then be apportioned among accounting