Balance Sheet Layout, Some Pointers

balance

A Level Business – Balance sheet layout, some pointers

by Philip Greening-Jackson

When I was an army officer a frequent answer to the question “why”, was to say “Because I say so”. That could be paraphrased as “I don’t know”. I used to try to learn why and explain to the men why a seemingly pointless instruction was there. There was almost always a reason.

So if you want to know why the items on a balance sheet are in the order they are you could simply learn the order, but if you know why they are in that order, it all makes sense. Also if you come across something new you can work out exactly where it should go.

So the basic pattern is that fixed assets go first, then current assets. You have to remember that. Beyond that just remember that the most fixed asset goes first and they go in descending order of fixedness or fixity or whatever adjective you care to invent.

In many businesses the most fixed asset you will have will be land and buildings, in that order. Plenty of businesses are in premises they have occupied for a century or more. The next most fixed is probably plant and machinery. A factory will expect to get a decade of use out of a decent machine and possibly more. After that would come motor vehicles which might be retained 2 or 3 years. So on down the spectrum until we reach that hinterland of assets which might be fixed, but are almost current. Here I am talking about short life assets such as computers.

Then we get to current assets and the pattern continues the same, like the markings on a snake! There will probably be 3 current assets in the examples you see- inventory (stock), debtors and cash. They go in that order. The trade cycle is that we have inventory which we sell. Now there is no guarantee that it ever will sell, we might be stuck with it, so that is the least liquid current asset. Once it is sold we are riding high because we are virtually certain that we shall be paid, so it becomes debtors. Once they pay we have cash (or bank which is the same thing) and that is the most liquid current asset of the lot.

So just follow those rules and you should not come too far adrift. If you want to learn more, see all relevant business and accounting A Level courses here.