UNIT 9:PROCESS THE BALANCE SHEET
Introductory activity
1. What is meant by balance sheet?
2. Outline the elements of balance sheet
3. From the following particulars, prepare a balance sheet of Mr.
Mugabo as at 31st March, 2022FRW)
Capital ………………………………..5,500,000
Drawings…………………………………100,000
Sundry debtors…………….……………1,000,000
Sundry creditors…………………………..800,000
Bank loan…………………………………200,000
Net profit………………………………….1, 600,000
Closing stock………………………………500,000
Plant and machinery………………………..1,500,000
Building …………………………………….1, 200,000
Land …………………………………………..3,000,000
Goodwill ………………………………………500,000Furniture and fixtures…………………………300,000
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9.1 Configuration of balance sheet accounts
Learning Activity 9.1
1. Referring to accounting equation, explain the elements of balance
sheet
2. Differentiate current assets from current liabilities
3. Classify the following accounts in either assets or liabilities
a. Stock
b. Loan payable
c. Bank Overdraft
d. Trade creditors
e. Accounts receivable
f. Premises
g. Owner’s drawings
h. Fixtures and fittings
i. Machinery
j.Buildingk. Prepaid expenses
9.1.1. Description of balance sheet
The term balance sheet refers to a financial statement that reports a company’s
assets, liabilities, and shareholder equity at a specific point in time.
The Balance Sheet lists the assets, liabilities, and equity accounts of the company.
The Balance Sheet is prepared ‘‘as on’’ a particular day, and the accounts reflect
the balances that existed at the close of business on that day.
The Balance Sheet isprepared on the last day that the Income Statement covers,
soif the Income Statement is for the period ending December 31,2002, the
Balance Sheet would be as on December 31, 2003.You can state the date in avariety of formats. All of the followingare acceptable:
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As on, December 31, 2022
December 31, 2022
On December 31, 2022
9.1.2. Elements of balance sheet
1. Assets
Business assets may be defined as resources owned by an entity that have the
potential for providing it with future economic benefits in the sense that they
help to generate future cash inflows or reduce future cash outflows.
Assets reported in the balance sheet are divided into two categories:
a. Current assets
These are defined as short-term assets that are held for resale, conversion into cash
or are cash itself. There are three main types of current assets: stock-in-trade, trade
debtors and cash. A temporary investment of funds in the shares of, say, a quoted
company or government securities should also be classified as a current asset. A
characteristic of current assets is that the balances are constantly changing as the
result of business operations.
• Stock-in-trade
represents the value of items purchased for resale that are still in stock at the year
end. They are regarded as a current asset becausethere is a high chance of the items
being converted into cash within the next 12 months.
• Debtors
Debtors represent the amount of money owed to the business and can be sub-divided
into trade debtors and others. The former category relates to customers who have
bought goods on credit terms and represents the amount of money still outstanding
from them at the year end. Other debtors could include dividends receivable from
investments in the shares of other companies.
• Cash
Cash is the amount of funds readily usable by the business and can eitherbe in
the form of cash or a balance in the business bank account.
b. Fixed assetsThese are assets a firm purchases and retains to help carry on the business. It is not
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intended to sell fixed assets in the ordinary course of business and it is expected that
the bulk of their value will be used up as the result of contributing to trading activities. Examples of fixed assets are premises, plant, machinery, furniture and motor
vehicles. A characteristic of fixed assets is that they usually remain in the business
for long periods of time and will only be sold or scrapped when they are of no further use.
3. Liabilities
Liability is a term in accounting that is used to describe any kind of financial
obligation that a business has to pay at the end of an accounting period to a
person or a business. Liabilities are settled by transferring economic benefits
such as money, goods or services. Liabilities are recorded on the right hand
side of the balance sheet, which includes different types of loan, creditors,
lender and suppliers. Liabilities can be of short term and long term. Short term
liabilities are due within an accounting period (12 months) and long term
liabilities become due within duration of more than 12 months.
a. Capital
This is the amount of money invested in the business by the owner(s). The
amount can increase through further investment of funds by the owner(s) or by
the business making a profit and can decrease when money is withdrawn from
the business for personal use or where a business loss is suffered (drawings).
Capital is regarded as a permanent source of finance since it is only repayable
in full when the business ceases. Until such time the amount is regarded as a
liability of the business as the amount is owed to the owner.
b. Current liabilities
These liabilities are defined as amounts repayable within12 months of the
balance sheet date. Typical examples include bank overdrafts and creditors.
Any loans repayable within the following year are also listed under current
liabilities.
Creditors can be divided into trade and other creditors. Trade creditors
represent the amount owing to suppliers of stock items that have been
purchased on credit terms. Other creditors could include amounts outstanding
for miscellaneous services.
c. Long-term liabilities
These represent the amounts payable after more than12 months. They include suchitems as bank loans and mortgages.
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Balance sheet formats
The balance sheet has two formats, horizontal format and vertical format.
1. Horizontal format
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2. vertical format
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9.1.3. Configuration of balance sheet in Sage line 100
As stated in previous sections, the balance sheet is generated after the journal
entries records were completed and well done. However, if not configured,
the balance sheet is displayed in French and no balances corresponding to
the entries made are shown. The configuration is therefore of paramount
importance to have a well displayed and balanced balance sheet corresponding
to entries made.
To get to the balance sheet we follow the steps below:
1. Click on ‘‘Start” menu2. Click on BS/Income statement
Figure 9. 1: Getting started with balance sheet configuration
In (1), click on stat, and then click on BS/Income statement (2)
Step 3. Remove ticks on details of account, print income statement and onprint int. balances. Only on print BS option must have a tick.
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Figure 9.2: Selecting balance sheet to be printed out
Step 4. After this, click OK and the following window is displayed:
Figure 9. 3: Selection of balance sheet print preview
Step 5: Remove a tick on day book quality, print preview and print once perdocument, leave a tick on “Print preview” only. After, click Ok.
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Then you get the balance sheet with accounts written in French “plan
comptable” because it was not configured before to math it with the accounts
we have in the company’s transactions
To configure the balance sheet, skip the step 3, and instead of clicking Ok, clickon “BS/Income statement user defined”.
Figure 9. 4: Selection of BS/ income statement user defined
Then you get the balance sheet which is in French. Delete all those accounts by:
• Right click-select all• Right click again then click on deleted selected elements
Figure 9.5: Selection all balance sheet accounts
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Figure 9.6: Deletion of non-configured balance sheet accounts
After deleting the selected elements, you get an empty window, then you can
configure the balance sheets element depending on the accounts you created inchart of account that appear in balance sheet.
Figure 9. 7: Blank window of balance sheet before its configuration
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Application activity 9.1
1. Define the term balance sheet
2. What is the difference between assets and liabilities?
3. Write down the layout of horizontal format of balance sheet.
4. Write down the steps followed to get to the configuration of balancesheet in Sage line 100
9.2. Assets configuration
Learning Activity 9.2
1. Contrast the current assets from non-current assets
2. Distinguish between intangible assets and tangible assets with 2
examples on each
3. Why is it necessary to make configurations of assets of the company
in sage line 100?
9.2.1. Fixed assets configuration
To make configurations on the elements of balance sheet, we shall use the
figures found in
learning activity 8.4 so as to have the net profit obtained in income statement
and transmit it in balance sheet to find total owner’s equity.
When configuring the fixed assets in balance sheet, first of all, the user must
have created those assets in chart of account and there must be transactions
that affected those assets in order to have the balances, the user follows the
following steps:
1. After deleting the accounts set in balance sheet by default and have a
blank window, Right click-add new element or click on “add” icon foundon navigation toolbar. The following window appears
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Figure 9. 8: Balance sheet configuration window
When we click in the header field, we find different options to select from
including header, transaction limit, balance limit, sub-total, total and
formula. In the header we put the type of asset to be configured, for example
“fixed assets”. In the transaction and balance limit, we put the account that
appears in chart of account of the company whose balance sheet is configured;
in subtotal we put the total assets or total liabilities and owner’s equity.
In code column, put any code either numeric or character. The field is not a
required option, i.e. it is possible to leave it empty.In this step, the header type will be fixed assets and it is created as follow:
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Figure 9. 9: Fixed assets header configuration
After creating fixed assets header, the next step is to create each fixed asset
available in chart of account of the company being dealt with. They will be of
balance limit type.
If balance limit is selected, the field of both, debit and credit becomes active,then the user is required to select “Both
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Figure 9.10: Configuration of a particular fixed asset account
1. Click where it was initially written header, and select balance limit
2. After typing account name (LAND in our case) and Code (not compulsory),
select land account in chart of account then its account number is
displayed.
3. Select both to mean that the account can both either be debited or
credited
4. Press “Enter” button to confirm the account.
Then proceed in the same way for other fixed assets comprised in the chart of
account. If we have land, building, equipment and machinery, the configurationresults for fixed assets will be as follow:
Figure 9. 11: Sample list of configured fixed assets
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9.2.2. Current assets configuration
The configuration of current assets follows the same steps as the one of fixed
assets, except only the difference in names and code. Current assets become the
header type, whereas the specific current assets created in the chart of account
are of balance limit type.
Current assets are created in the following steps.
1. Right click-add new element or click on add icon on navigation toolbar2. In the name field, type current assets and put the code of your choice
Figure 9. 12: Creation of current assets header
3. Click on add, to have free field to be able to create the current assets
as found in the chart of account. And create the first current asset. If
we have for example inventory (stock), debtors, bank and cash. Start bycreating stock as follow:
Figure 9. 13: Configuration of stock as element of current assets
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Then proceed in the same way to create other current assets and the
following output will be displayed:
Figure 9. 15: Creation of total assets sub-total
Note: The accounts are arranged in descending order, from the last created
to the first created. The user can therefore move the account upwards or
downwards to arrange the account according to the vertical format by clickingon shift up or shift down buttons.
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Figure 9. 16:Arranging balance sheet assets accounts using shift up and down tabs
Application activity 9.2
1. With two examples on each, distinguish between current assets and
no-current assets
2. What are the steps followed to create fixed assets in balance sheetconfiguration?
9.3 Owner’s equity configuration
Learning Activity 9.3
1. What is meant by owner’s equity?
2. Explain the elements of owner’s equity?3. In which side of balance sheet do we find owner’s equity?
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9.3.1 Meaning and elements of owner’s equity
Owner’s equity represents the owner’s investment in the business minus
the owner’s draws or withdrawals from the business plus the net income (or
minus the net loss) since the business began.
Owner’s equity is essentially the owner’s rights to the assets of the business. It’s
what’s left over for the owner after you’ve subtracted all the liabilities from the
assets. If you look at your company’s balance sheet, it follows a basic accounting
equation: Assets – Liabilities = Owner’s Equity.
Owner’s equity is found by
a. Capital
Capital means that amount or asset which is invested in business by businessman
or owner of business. When a person starts any business or profession, he
brings some money in cash and some other assets like building, furniture and
machinery. These will be his capital.
b. Drawings
A drawing in accounting terms includes any money that is taken from the
business account for personal use. It normally reduces the capital of the
business.
A journal entry to the drawing account consists of a debit to the drawing account
and a credit to the cash account. A journal entry closing the drawing account
of a sole proprietorship includes a debit to the owner’s capital account and a
credit to the drawing account.
c. Profit
Profit describes the financial benefit realized when revenue generated from a
business activity exceeds the expenses, costs, and taxes involved in sustaining
the activity in question.Any profits earned funnel back to business owners, who
choose to pocket the cash, distribute it to shareholders as dividends, or reinvest
it back into the business.
d. Loss
A loss is an excess of expenses over revenues, either for a single business
transaction or in reference to the sum of all transactions for an accounting
period. The presence of a loss for an accounting period is closely watched by
investors and creditors, since it can signal a decline in the creditworthiness
of a business. This is particularly the case when the loss is derived fromjust the operational activities of a business. Losses may also result from the
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sale of an asset (other than inventory) for less than the amount shown on the
company’s books.
9.3.2 Configuration of owner’s equity
The configuration of owner’s equity is done in the same process as the
configuration of other accounts of balance sheet. First the users creates the
account of owner’s equity and names it as header type, then create capital,
drawings and profit or loss as balance limit.
To create owner’s equity header, right click and click on add new element. Then
leave the header in header field, and in the name field type owner’s equity, and
code field fill in the code of choice. By doing so, you will have the followingoutput:
Figure 9. 17: Owner’s equity header configuration
After writing the owner’s equity header, the following step is to configure,
capital, drawings and profit account. The configuration of capital will have thefollowing output:
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Figure 9. 18: Configuration of capital account
After configuring capital account, follow the same steps to configure profit anddrawing, therefore the following output will be displayed:
Figure 9. 19: Configured owner’s equity accounts
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Application activity 9.3
1. What is meant by owner’s equity?
2. Distinguish between profit and loss
3. What are the journal entries on drawing account?
4. In balance sheet, make journal entries for owner’s equity (capital,profit (or loss) and drawings.
9.4. Long term and current liabilities configuration
Learning Activity 9.4
1. Differentiate long term liabilities from current ones
2. Give three examples of business current liabilities and three
examples of long term (non-current liabilities)
9.4.1. Long term (Non-current) liabilities configuration
These represent the amounts payable after more than 12 months. They include
such items as bank loans and mortgages. Noncurrent liabilities are grouped by
type (loans payable, bonds payable, notes payable and so on).
To configure noncurrent liabilities in balance sheet, Right click-add new element
or click on add icon on navigation toolbar.Start by noncurrent liabilities with header type
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Figure 9.20: Non-current liabilities header creation
After setting configuration for noncurrent liabilities, right click then click on
add new element. Then add the specific noncurrent liabilities accounts withbalance limit as type. Thus, we will have the following:
Figure 9.21: Creation of loan account as non-current liability account type
9.4.2. Current liabilities configuration
These liabilities are defined as amounts repayable within 12 months of the
balance sheet date. Typical examples include bank overdrafts and creditors.
Any loans repayable within the following year are also listed under current
liabilities. Current liabilities are listed in the order in which they are expected
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to be satisfied. The ones that will be paid first are listed first.
To make configurations of current liabilities, follow the same procedures as one
followed in configuring noncurrent liabilities. Thus, start by creating current
liabilities as header type, and then after, configure individual accounts forcurrent liabilities with balance limit type.
Figure 9. 22: Current liabilities header creation
After this, you can create the current liabilities accounts with balance limit type. If
we have creditors (accounts payables) in the chart of account, the configuration willbe as follow
Figure 9.23: Creation of creditor’s account
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To find the results of configured balance sheet,
• Click on Stat menu-BS income statement
• Tick on print BS only and click ok
• Select print preview
• Click OkThe following balance sheet will therefore be displayed:
Figure 9. 24: Balance sheet presentation
As shown in the balance sheet above, the total assets are equal to total liabilities
with 12,390,000 FRW on both sides. Initially, there was a shortage of 50,000
FRW, because the net profit amount of 50,000 FRW realized by the business in
income statement was not yet transferred to balance sheet. After transferring
it, both assets and liability sides were equalized.
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Application activity 9.4
1. Give the steps followed to show balance sheet results in Sage line
100
2. What is the process of configuring assets in balance sheet
configuration?9.5 Equality of assets and liabilities
Learning Activity 9.5
1. State the accounting equation
2. Why should assets side of balance sheet always be equal to its
liability side?
Assets, liabilities and equity are the three largest classifications in your
accounting spreadsheet. Assets are everything your business owns. Liabilities
and equity are what your business owes to third parties and owners. To balance
your books, the golden rule in accounting is that assets equal liabilities plus
equity.
The main accounting equation is: Assets = Liabilities + Equity. Together, they
make up a company’s balance sheet. The concept behind it is that everything
the business has come from somewhere either a third party, such as a lender,
or an owner, such as a stockholder. Every unit of franc that a business holds is
attributed to a third party or an owner. This means that each thing a business
has is classified as both an asset and a liability or an asset and equity. Here are
two examples:
An asset that is a liability: If a business has 100,000 FRW, but you borrowed
it from George. The $10 is both an asset (cash) and a liability (a loan that you
need to pay back).
An asset that is equity: You invested 2000,000 FRW in your business buying
equipment. The 2000,000 FRW is both an asset (equipment) and equity
(owner’s equity that you should get back eventually).
Say your business earns a 500,000 FRW profit that you put into a checkingaccount. That profit is both an asset (cash) and equity (business profit held for
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future use). If your business collapsed tomorrow, the equity would be split
between the owners.
Taking an example of the balance sheet presented in the lesson 9.4
Figure 9.25: Equality of balance sheet assets and liabilities
As presented in balance sheet above, total assets were 12,480,000 FRW minus
90,000 FRW depreciation, which made the total of 12,390,000 FRW. These
assets are equal to liabilities obtained added to owner’s equity with 1,239,000
FRW. In SAGE line 100, the total liabilities and total owner’s equity have negative
signs to mean that they have credit balance.
The profit of 50,000 FRW found in the income statement in unit 7.4 is the one
that was transferred to profit owner’s equity to increase the capital in balance
sheet balance sheet and drawings were deducted from the total to get the total
of the owner’s equity. Hence the balance sheet total assets have become equalto total liabilities plus owner’s equity.
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Application activity 9.5
1. What is owner’s equity?
2. What is the fundamental relationship between basic accounting
equation elements?3. What is the impact of an asset on the accounting equation?
End unit assessment
1. What is meant by balance sheet?
2. State the two types liabilities
3. State the elements of accounting equation
4. Explain owner’s equity?
5. You are given the following information extracted from XYZcompany Ltd in 2022
Required: a. Prepare balance sheet for the above information
b. Make configuration for the above balance sheet accounts
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REFERENCES
1. Sage France (2016), Manuel pédagogique Version 16, France
2. SaoudJayed MASHKOUR (2019), Accounting in English, Iraq
3. Elizabeth A. MINBIOLE (2000), Accounting principles II, NEW YORK
4. PRU MARRIOTT, J.R EDWARDS AND H.J MELLETT 2002), Introduction to
accounting, 3rd edition, London
5. Kate MOONEY (2008), The essentials of accounting dictionary, Canada
6. Jeffry R. HABER (2004), Accounting demystified, USA
7. BPP Learning media Ltd (2006), Fundamentals of accounting, UK
8. https://www.wallstreetmojo.com/accounting-rules 23/01/2023
9. https://www.techtarget.com 23/01/2023
10. https://www.myaccountingcourse.com/accounting-dictionary/salesjournal 25/01/2023
11. https://www.wikipedia.org 01/02/2023
12. https://www.wikipedia.org 01/02/202313. https://www.investopedia.com/terms/t/trial_balance.asp 04/02/2023