Accounts Demystified The SBL transactions

1. Accounts Demystified The SBL transactions Notes • Each slide represents one transaction. Each step of a given transaction is shown separately • To advance a step forward, left click your mouse or press Page Down on your keyboard • To go back a step, press Page UP or right click with your mouse and select Previous

2. Transaction 1 : Pay £10k cash into SBL’s bank account as starting capital (share capital) 70 Jump to next slide This is the balance sheet before this transaction. There are no assets and no claims over those assets because we haven’t entered any transactions yet. 60 Back to prev slide The first thing we have to do is show £10k in the company’s bank account. 50 All this £10k is owed to the shareholders (ie Sarah), so create a box called share capital to represent her claim over £10k worth of the company’s assets. 40 The bars are level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. 30 20 10 0 Assets Cash Claims Share capital

3. Transaction 2 : SBL borrows £10k from Sarah’s parents 70 Jump to next slide This is the balance sheet before this transaction – it’s just the balance sheet at the end of the last transaction. 60 SBL has received more cash. We have a cash box already. We therefore increase the size of the cash box to £20k. Back to prev slide 50 This cash was not a gift from Sarah’s parents. They expect to get it back eventually. The company therefore has to recognise that it owes this money. Sarah’s parents have a claim over the company’s assets, so we create a box of size £10k and call it loans. 40 The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. 30 20 10 Cash Loans Share capital 0 Assets Claims

4. Transaction 3 : Buy £9k of fixed assets (car) 70 Jump to next slide This is the balance sheet before this transaction. 60 SBL has paid out cash. We therefore decrease the size of the cash box by £9k. Back to prev slide 50 The company now has a new type of asset – the car. We create a box called fixed assets with a height of £9k, being the value of that asset. 40 The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. 30 20 Loans Cash 10 Fixed assets Share capital 0 Assets Claims

5. Transaction 4 : Buy stock for £8k cash 70 Jump to next slide This is the balance sheet before this transaction. 60 SBL has paid out more cash. We therefore decrease the size of the cash box by £8k. Back to prev slide 50 We now need a box to show the stock, which is an asset of the company. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. 40 30 20 Fixed assets Loans 10 Share capital Cash Stock 0 Assets Claims

6. Transaction 5 : Buy £20k of stock (on credit) This is the balance sheet before this transaction. 70 SBL has bought more stock. We therefore increase the size of the stock box by £20k. Jump to next slide 60 SBL hasn’t paid for the stock yet. It thus has a liability to the supplier – ie the supplier (a “trade creditor”) has a claim over SBL’s assets. Back to prev slide The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. 50 40 30 20 Fixed assets Trade creditors Loans 10 Stock Share capital Cash 0 Assets Claims

7. Transaction 6 : Sell £6k of stock for £12k (cash on delivery) Trade creditors Loans Share capital 70 Jump to next slide This is the balance sheet before this transaction. We also know SBL has received £12k of cash, so we increase the cash box by £12k. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. The assets of the company have increased. No liability has been created, so this transaction has made the shareholders richer. We therefore create a box called “Retained profit”. SBL has delivered £6k of stock, so we must reduce the stock box by £6k. 60 Back to prev slide 50 40 Fixed assets 30 20 Stock 10 Cash 0 Assets Claims Retained profit

8. Transaction 7 : Sell £12k of stock for £30k (on credit) Trade creditors Loans Share capital This is the balance sheet before this transaction. This time, however, SBL’s customer has not yet paid. This debt is an asset of SBL. We therefore create a box called “Trade debtors”. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. Once again, the assets of the company have increased and again the shareholders are now richer. We therefore increase the size of the Retained profit box. SBL has delivered £12k of stock, so we must reduce the stock box by £12k. 70 Jump to next slide 60 Back to prev slide 50 Fixed assets 40 30 Stock 20 Trade debtors 10 Cash Retained profit 0 Assets Claims

9. Transaction 8 : Rent equipment and buy stationery for £2k on credit Loans Share capital This is the balance sheet before this transaction. Unlike the car, the use of the office equipment and the stationery are not assets (because they are all used up during the year). We therefore reduce Retained profit. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has received a bill for £2,000 worth of rental and stationery. This increases SBL’s liabilities so we must increase Trade creditors by £2k. 70 Jump to next slide Fixed assets Trade creditors 60 Back to prev slide Stock 50 Trade debtors 40 30 20 Retained profit 10 Cash 0 Assets Claims

10. Transaction 9 : Pay car running expenses of £4k Fixed assets Trade creditors Stock Trade debtors Loans Share capital These expenses are “gone”, so the shareholders are poorer and we must therefore reduce retained profit again. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has paid £4,000 in cash to keep the car running, so we must obviously reduce the cash box by £4k. This is the balance sheet before this transaction. 70 Jump to next slide 60 Back to prev slide 50 40 30 20 Retained profit 10 Cash 0 Assets Claims

11. Transaction 10 : Pay £1,000 interest on long-term loan Fixed assets Trade creditors Stock Trade debtors Loans Share capital Again, this has cost the shareholders so we must reduce retained profit. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has paid £1,000 in cash to Sarah’s parents as interest on the loan. We therefore reduce the cash box again. This is the balance sheet before this transaction. 70 Jump to next slide 60 Back to prev slide 50 40 30 20 10 Retained profit Cash 0 Assets Claims

12. Transaction 11 : Collect £15k cash from debtors Fixed assets Trade creditors Stock Loans Share capital The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. This is the balance sheet before this transaction. SBL has collected £15k from its customers so the trade debtors box must now be smaller. SBL now has more cash in its bank account so we must increase the cash box. 70 Jump to next slide 60 Back to prev slide 50 40 30 Trade debtors 20 10 Retained profit Cash 0 Assets Claims

13. Transaction 12 : Pay trade creditors £10k owed to them Fixed assets Stock Loans Trade debtors Share capital The amount SBL now owes to trade creditors is £10k, so we reduce the trade creditors box by £10k. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has paid £10k to trade creditors, so there must be £10k less in the bank account. We therefore reduce the size of the cash box. This is the balance sheet before this transaction. 70 Jump to next slide 60 Back to prev slide 50 Trade creditors 40 30 20 Cash 10 Retained profit 0 Assets Claims

14. Transaction 13 : Pay £8k up front on account of stock Fixed assets Loans Stock Share capital Trade debtors What, though is the other transaction? It can’t be stock because SBL has not yet received the stock. At the moment, all it has is a right to the stock. This is an asset, however. We create an asset box called “Prepayments”. Think of “prepayments” as meaning “goods and services we are owed” This is the balance sheet before this transaction. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has paid £8k to a supplier of stock, so there must be £8k less in the bank account. We therefore reduce the size of the cash box. 70 Jump to next slide 60 Back to prev slide 50 Trade creditors 40 30 20 10 Retained profit Cash Prepayments 0 Assets Claims

15. Transaction 14 : Pay £3k dividend in cash to shareholders (Sarah) Fixed assets Trade creditors Loans Stock Share capital Trade debtors Prepayments A dividend is simply the shareholders taking out of the company some of the profits that the company has made. Thus retained profit must also go down by £3k. This is the balance sheet before this transaction. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has paid out £3k in cash to Sarah. We must therefore reduce the size of the cash box. 70 Jump to next slide 60 Back to prev slide 50 40 30 20 10 Retained profit Cash 0 Assets Claims

16. Adjustment 15 : Adjust for £2k of expenses not yet billed Fixed assets Stock Loans Share capital Trade debtors Prepayments What is the other entry? This is like transaction eight where SBL bought stationery etc and received an invoice for it to be paid later. The difference here is simply that SBL hasn’t got the bill yet. We therefore create a claim over SBL’s assets but instead of increasing the Trade creditors box, we create a new one called “Accruals”. This is the balance sheet before this transaction. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. SBL has incurred some telephone costs, albeit that the bill has not yet arrived. The shareholders are undoubtedly poorer, so we must reduce retained profit again. 70 Jump to next slide 60 Back to prev slide 50 Trade creditors 40 30 Accruals 20 10 Retained profit Cash 0 Assets Claims

17. Adjustment 16 : Adjust for £3k depreciation of fixed assets Trade creditors Loans Accruals Share capital 70 This is the balance sheet before this transaction. SBL bought a car at the beginning of the year. The car is now worth less than it was when new. The fixed assets are therefore worth less than they were and we must reduce them. This reduction in the value of the fixed assets is another cost to the shareholders, so again we must reduce retained profit. The bars are again level so the balance sheet now balances and we have completed this transaction – click to go to the next transaction. Jump to next slide 60 Back to prev slide 50 Fixed assets 40 Stock 30 Accruals 20 Trade debtors 10 Prepayments Retained profit Cash 0 Assets Claims

18. Adjustment 17 : Adjust for £4k corporation tax liability Trade creditors Loans Accruals Share capital 70 This tax is another cost that falls to the shareholders, so again we must reduce retained profit. This is the balance sheet before this transaction. The bars are again level so the balance sheet now balances and we have completed this transaction. That is it. This is the final SBL balance sheet. SBL is going to have to pay some corporation tax on its profits, so HM Revenue and Customs have a claim over SBL’s assets. We create a box called Tax liability. Jump to next slide 60 Back to prev slide 50 Fixed assets 40 Stock 30 Tax liability 20 Trade debtors 10 Prepayments Retained profit Cash 0 Assets Claims