Equity section in balance sheet

AlskiAlski New MemberPosts: 5Registered
Can someone give me advice on balance sheet equity please?

How is the value of Fixed assets reflected in the equity section of a balance sheet? Is it added to retained earnings as distributable equity?

For example if a computer has a NBV of £250, is this balanced against the retained earnings section

Clarification would be appreciated.

Alski

Comments

  • BluewednesdayBluewednesday Font Of All Knowledge Posts: 1,624Registered
    When the fixed asset is purchased it's balancing entry is the bank.

    As it is depreciated the asset value is reduced and the balancing entry is the depreciation expense in the profit and loss account.

    Therefore depreciating an asset is reducing the profit which is what relates to the retained earnings.

    Is that what you meant?
  • AlskiAlski New Member Posts: 5Registered
    Hi there thanks for your repl.

    What I am unclear about is how the financing section for equity is supposed to reflect the NBV of the asset (in the Non-current asset section) so that the balance sheet balances.

    Should the NBV be financed by the retained profit (which reflects trading profit only)?
  • slackdaslackda Trusted Regular Posts: 460Registered
    im not quiet sure what you getting at here....

    Assets-Liabilities=Capital or Equity Equity will hold your Retained profit and Shareholdings or Captial.

    Like Blue said your Asset is Depriciated and the charge is put to your P&L and in turn rolled up into your profits/loss's so effectivly that becomes the balancing entry.
  • AlskiAlski New Member Posts: 5Registered
    So the value of the fixed asset is equal to either (part of) retained profit or Capital?

    In this case part of the capital reserve since it cannot be distributed?
  • BluewednesdayBluewednesday Font Of All Knowledge Posts: 1,624Registered
    No the asset devaluation is included in the profit calculation.

    The retained earnings includes the profit made int he year (which has been reduced by the depreciation) so the devaluation of the asset is shown in the bottom half of the balance sheet in the profit figure which is included in retained earnigns.
  • BluewednesdayBluewednesday Font Of All Knowledge Posts: 1,624Registered
    Alski wrote: »

    In this case part of the capital reserve since it cannot be distributed?

    What do you mean by this, the capital reserve has nothing to do with tangible fixed assets?
  • AlskiAlski New Member Posts: 5Registered
    The value of the fixed asset needs to have an equivilant value in the Equity section in order to balance.

    My question about the ciomputer is what part of the equity section does it balance against? The options are: Share capital, Revenue or capital reserves.

    I can't think of anywhere else it would be reflected.

    If the only assets in the company were the computer at a value of £250, and there was no cash or cash equivilant, and no liabilities then the net assets would be £250.

    If the company had been started with share capital of £1000, but there was no trading profit how would the balance sheet look?
  • slackdaslackda Trusted Regular Posts: 460Registered
    where has £750 gone then?

    ok, if you had a Share Capital of £1000 it would suggest that £1000 has been invested into the company .... and paid to the company.

    now if nothing had been bought your equity would be £1000 and your assets also £1000 in the form of the bank account having a balance of £1000.

    So you have bought a computer and spent £250 of the start up captial, your bank balance is now £750..Total assets therefore are £1000 equal to Your Share capital.

    hope that makes sense.
  • AlskiAlski New Member Posts: 5Registered
    Okay, here is the draft balance sheet with the computer shown as non current asset depreciated.

    The equity section is out by the value of the asset. How do I correct this?
    Cost Dep'n Net
    £ £ £
    Non Current Assets 289.99 58.00 231.99

    Current Assets
    Inventories -
    Trade Receivables -
    Cash & Cash Equivalents 5,525.18
    5,525.18
    Total Assets 5,757.17
    Current Liabilities
    Trade Payables -
    Tax Liabilities 3,754.61
    3,754.61
    Net Current Assets 1,770.57
    Total Liabilities 3,754.61
    Net Assets 2,002.56


    Equity
    1000 Ordinary Shares of £1 each (but part paid at £0.10) 100.00
    Capital Reverves -
    Revenue Reserve 1,670.57
    Total Equity 1,770.57
  • Bookworm55Bookworm55 Trusted Regular Posts: 479Registered
    Alski wrote: »
    If the only assets in the company were the computer at a value of £250, and there was no cash or cash equivilant, and no liabilities then the net assets would be £250.

    If the company had been started with share capital of £1000, but there was no trading profit how would the balance sheet look?

    An accumulated trading loss of £750?
    The value of the fixed asset needs to have an equivilant value in the Equity section in order to balance.

    Why?

    example 1: I buy a fixed asset for cash. Fixed Asset increases. Cash decreases. Total assets don't change, net assets don't change, equity doesn't change.

    example 2: I take out a loan to buy a fixed asset. (assume the loan exactly matches the cost of the asset) Assets increase by the value of the fixed asset, Liabilities increase by the value of the loan. Net assets do not change. Equity does not change.
  • slackdaslackda Trusted Regular Posts: 460Registered
    ok first guess the the Computer has bee recorded as a P&L purchase as well as a Asset, there fore decreasing your Operating profit, and causing a mis balance in your equity..


    that is a pure guess though......
  • Bookworm55Bookworm55 Trusted Regular Posts: 479Registered
    Alski wrote: »
    Okay, here is the draft balance sheet with the computer shown as non current asset depreciated.

    The equity section is out by the value of the asset. How do I correct this?
    Balance sheet

    OK, that look's weird. Where is this coming from? How sure are you of each figure?

    I'd be far more inclined to think you're assets are too high or liabilities too low than you need to do anything in the equity section.

    Perhaps, as suggested above, you've put the cost of the computer through the P&L and the balance sheet. Perhaps you've not accounted for how it was purchased (cash, overdraft, loan)
  • deanshepherddeanshepherd Font Of All Knowledge Posts: 1,809Registered
    No-one will be able to answer your question without seeing your workings. Basically, your trial balance doesn't balance.

    My guess would be you havn't credited the asset purchase to either the DLA/bank/credit card account etc..

    ..and, you havn't put the depreciation through the P&L.

    Might be a good place to start looking.
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