Balance Sheets

Question 1

Define debtors

Answer 1

• People who owe the business money.
• They represent the total value of sales to their customers for which payment has not yet been
  received.

Question 2

Define trade creditors

Answer 2

• Businesses to which the business owes money.
• A business is likely to have purchased goods from suppliers or services on credit so that payments are still outstanding.
• These debts must be be paid within 12 months/a short
  period of time.

Question 3

Define drawings - balance sheet

Answer 3

• Money taken out of the business by the owner - a reduction of owner’s capital – a withdrawal by a sole trader (the owner) from the business for personal reasons.
• Represents the salary taken out of an unlimited liability business.
• If the business is owned by one person then it will represent their salary

Question 4

Define working capital

Answer 4

• The day-to-day finance available for running a business.
• Formula: current assets – current liabilities = working capital.

Question 5

Define capital expenditure

Answer 5

• Spending on new fixed assets – such as machinery, buildings, polytunnels.

Question 6

Usefulness of balance sheets

Answer 6

• Shareholders are owners of the business, so they want to know how well it is doing.
• Gives a picture of the assets/what the business owns and the liabilities/what the business owes.
• If the current liabilities are a lot more than the current assets in each year, then the business could have a problem in paying its debts.
• Can be compared over time.

Question 7

Importance of working capital

Answer 7

• Needed to fund the day-to-day finance available for running a business. If there is not enough cash for the business then it may not be able to pay its bills on time.
  If a business borrows too much through trade credit, then it might be unable to pay invoices when they are due.
• Working capital is needed to pay for raw materials and running costs. Production/growth would be halted if a business runs out of raw materials.
• Working capital is also needed to fund the credit offered to customers (debtors) when making a sale. Customers may go to a competitor if a business cannot offer credit.
• If a business has too little working capital it may struggle to finance increased production without straining its liquidity position.

Question 8

Define a balance sheet

Answer 8

A measure of the assets and liabilities of a business.

Question 9

Explain fixed assets

Answer 9

Items owned by the business which do not change in the short term/they last a long time/used
repeatedly,
e.g. buildings/machines/vehicles.

Question 10

Explain current assets

Answer 10

Assets which can be converted into cash quickly,
e.g. stock, debtors, cash in till/bank

Question 11

Explain current liabilities

Answer 11

What the business owes, and which must normally be paid within 12 months,
e.g. overdraft, creditors.

Question 12

Explain long-term liabilities

Answer 12

Money owed to others that will
take more than a year to pay back, e.g. bank loan and debentures.

Question 13

Explain capital employed

Answer 13

The total money that has been invested in the business such as shareholders’ funds (share capital);
owners’ capital; retained profit and reserves
[Capital Introduced + Retained Profit + Long Term Liabilities]