balance sheet

lgarside

I know this sounds really dumb, but can someone explain why the balance sheet will always balance. Is the profit figure from the previous year incorporated already into say the bank and creditors when you do the next years balance sheet and then the new profit will be in the bank, creditors fig etc which is why it balances.

Thanks for your help and sorry for being dim, I'm just a little confused, been a while since i've done the balance sheet.

Cullen

The accounting equation is Assets - Liabilities = Capital.
This is the balance sheet.
Assets are bulidings, vehicles, cash etc.
Liabilities are creditors, loans etc
Capital is how the above is financed which includes profits brought forward from previous years.
Has this helped?

lgarside

I think so, so for a partnership if you had say 50,000 profit from yr ended dec 07 when you do the yr end for dec 08 will this show as profit c/f in the second half of the balance sheet e.g

Net assetts 90,000

financed by;

profit 07 b/f 50,000
Profit for yr end 08 30,000
capital 10,000

or will this profit already be in the bank, used to buy assets etc which you used for the 07 bal sheet, so you don't literally c/f the profit?

lgarside

balance sheet

Hi Cullen I think I have got it now, if in a partnership they were to feed some of their drawings back into the partnership this would show as retained in the business for the balance sheet 07 (would you have to do double entry to show this before doing the ye end a/c's?), and then you carry this forward as the opening capital figure. The drawings don't matter because this has been taken out of the business and not used to finance any of the assets anyway.
I don't think this was really covered last year....

Cullen

Profit is included in the Capital and cash is included in the assets.
Think of them as separate things

karenv

Not quite sure im following you.
But the capital figure is the amount put in by the partners. Each would have a capital account showing what they paid into the business. Drawings are what they took as remuneration for working. Why would they put this back?

The balance sheet balances because the assets I.e cash, bank debtors etc less the liabilities i.e the creditors etc leave a figure which equals the amount of the origional capital put into the business plus the profits brought forward from previous years added to the current years profit.

Does this help?

lgarside

balance sheet

Thanks that helps but how would you show the profits b/f from previous years in the balance sheet for a sole trader/ partnership. With companies you just have a retained earnings fig but I don't think you have this with partnerships do you?

karenv

The profits are added to and drawings deducted from the capital each year.

Cullen

In a partnership the profits are divided between the partners in the proportion agreed. Therefore their capital accounts would reflect the ytd profits.
It is quite difficult to explain, sorry for that. This is unit 5 stuff. Why don't you read through your text book for this unit? The unit is mainly for sole traders and partnerships.
When you have read through the unit and if you still have a problem, pm me and I'll talk you through whatever you want.

Panda

Hi Cullen,

You seem to know what your talking about do you have any suggestions for my question.

I have dumped straight into intermediate level and am scared ive dumped to far, i work in an accounts environment and the AAT people thought it would be best for me to join at this level but when i have opened the books it just looked like a foreign language and i just don't know how to tackle it.

Thanks
Panda

Cullen

If you are working in an accounts environment I bet you do know an awful lot, but just not aware of how much you do know.
If you could get hold of a Foundation text book, Osborne is good, and read through units 1,2 and 3, this will help you get an idea of what you are expected to know at Intermediate. Ask a fellow student in your college or see if you can buy someone's old one.
Most advice on the AAT forums has been to work through every single chapter's questions in your text book and any extra questions too. If you get stuck on a subject post on here, or pm me and you will get lots of help.
I found it difficult relating my studies of a manual system to working on a computerised system. I was advised to work out what was actually being affected when information was entered on the computer and which accounts were affected. This gave my studies a bit more meaning and relevance.
I am not the expert though, for that Peugot is the man for accounts, or Sandy Hood for costing.
I'm sure you will be fine. Good luck.