Lesson Notes By Weeks and Term v3 - Senior Secondary 1
Balance Sheet
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Balance Sheet
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Subject: Financial Accounting
Class: Senior Secondary 1
Term: 3rd Term
Week: 4
Theme: Classes Of Accounts And Final Account Of A Sole Trader (Proprietor)
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Distinguish between as sets and liabilities. Identify the different types of as sets and liabilities. Classify as sets and liabilities. Prepare a balance sheet.
2. 1. The Balance Sheet The Balance Sheet is a statement of financial position that presents a company's assets, liabilities, and owner's equity at a specific point in time (e.g., as at 31st December 2023). It is based on the fundamental accounting equation: Assets = Capital + Liabilities Its primary purpose is to show what the business owns, what it owes, and the owner's residual claim on the assets. Unlike the Income Statement which covers a period, the Balance Sheet is a snapshot on a particular date. 2.
2. Assets Assets are resources controlled by the business as a result of past events and from which future economic benefits are expected to flow to the entity. In simpler terms, assets are what the business owns.
Classification of Assets: Assets are primarily classified into two main categories: 2.2.
1. Non-Current Assets (Fixed Assets): These are assets acquired for long-term use in the business to generate income, not for resale. They are expected to provide economic benefits for more than one accounting period (usually more than one year).
Characteristics: Long life, high value, not easily converted to cash, used in operations.
Examples in a Nigerian Context: Land and Buildings: A shop building in Tejuosho Market, a factory in Ogun State, a school building in Abuja.
Plant and Machinery: A generator used in a business, an industrial sewing machine in a fashion house, grinding machines in a local mill.
Motor Vehicles: Delivery vans for a logistics company, staff buses, taxis owned by a transport company.
Furniture and Fittings: Office desks and chairs, display shelves in a supermarket, air conditioners.
Fixtures and Fittings: Permanent installations like fixed lighting, plumbing. 2.2.
2. Current Assets: These are assets that are expected to be converted into cash, sold, or consumed within one accounting period (usually one year or the operating cycle, whichever is longer). They are essential for the day-to-day operations of the business.
Characteristics: Short life, easily convertible to cash, used in operations or held for sale.
Examples in a Nigerian Context: Inventory (Stock): Goods held for resale (e.g., bags of rice in a wholesale store, mobile phones in an electronics shop, bales of Ankara fabric in a textile shop).
Trade Receivables (Debtors): Money owed to the business by customers for goods or services supplied on credit (e.g., a customer who bought items on credit from a provision store).
Cash at Bank: Money held in the business's bank account.
Cash in Hand: Physical cash available in the business premises (e.g., petty cash, sales proceeds yet to be deposited).
Prepaid Expenses: Expenses paid in advance for which the benefit is yet to be fully received (e.g., rent paid for the next year, insurance premium paid for 6 months in advance). 2.
3. Liabilities Liabilities are present obligations of the business arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. In simpler terms, liabilities are what the business owes to external parties.
Classification of Liabilities: Liabilities are also classified into two main categories: 2.3.
1. Non-Current Liabilities (Long-Term Liabilities): These are obligations that are due for repayment after more than one accounting period (usually more than one year).
Characteristics: Long repayment period.
Examples in a Nigerian Context: Bank Loans (Long-Term): A loan obtained from a commercial bank (e.g., Zenith Bank, Access Bank) repayable over 3-5 years for business expansion.
Mortgages: A loan secured against property, typically for purchasing land or buildings.
Debentures: Long-term debt instruments issued by large companies to raise funds from the public. 2.3.
2. Current Liabilities: These are obligations that are due for repayment within one accounting period (usually one year or the operating cycle).
Characteristics: Short repayment period.
Examples in a Nigerian Context: Trade Payables (Creditors): Money owed by the business to suppliers for goods or services purchased on credit (e.g., a supermarket owing a distributor for beverages supplied). * Bank Overdraft: When a business account goes into a negative balance, meaning it has withdrawn more money than it has in the account, companies to raise funds from the public. 2.3.
2. Current Liabilities: These are obligations that are due for repayment within one accounting period (usually one year or the operating cycle).
Characteristics: Short repayment period.
Examples in a Nigerian Context: Trade Payables (Creditors): Money owed by the business to suppliers for goods or services purchased on credit (e.g., a supermarket owing a distributor for beverages supplied).
Bank Overdraft: When a business account goes into a negative balance, meaning it has withdrawn more money than it has in the account, typically for short-term working capital needs.
Accrued Expenses: Expenses incurred but not yet paid (e.g., electricity bill for the past month, salaries owed to employees for the current month).
Short-Term Loans: Loans repayable within one year. 2.
4. Owner's Equity (Capital) Owner's Equity represents the owner's claim on the assets of the business. It is the residual amount remaining after deducting liabilities from assets. It includes the initial capital invested, additional capital, retained earnings (profit less drawings), and less any losses incurred.
Components of Owner's Equity: Capital: Initial investment by the owner.
Net Profit: Profit earned during the period (increases capital).
Drawings: Cash or goods withdrawn by the owner for personal use (reduces capital). 2.
5. Distinctions between Assets and Liabilities | Feature | Assets | Liabilities | | :------------------- | :---------------------------------------- | :------------------------------------------ | | Definition | Resources owned by the business. | Obligations owed by the business. | | Economic Benefit | Expected future inflow of economic benefits. | Expected future outflow of economic benefits. | | Ownership | Belong to the business. | Owed to external parties. | | Nature | Economic resources. | Economic obligations. | | Effect on Wealth | Increases the wealth of the business. | Decreases the wealth of the business. | | Balance Sheet Side | Shown on the 'Assets' side. | Shown on the 'Capital and Liabilities' side. | 2.
6. Preparation of a Balance Sheet (Vertical Format) The vertical format is commonly used and preferred for examinations.
Steps:
1. Heading: State the name of the business, "Balance Sheet," and the specific date (e.g., "As at 31st December 2023").
2. Assets Section: List Non-Current Assets first, detailing each asset and its value. Sum them up. List Current Assets next, detailing each asset and its value. Sum them up. Calculate Total Assets by adding Total Non-Current Assets and Total Current Assets.
3. Capital and Liabilities Section: Start with Capital: Begin with the opening capital, add net profit (or deduct net loss), and deduct drawings to arrive at the closing capital. List Non-Current Liabilities next, detailing each liability and its value. Sum them up. List Current Liabilities last, detailing each liability and its value. Sum them up. * Calculate Total Capital and Liabilities by adding Closing Capital, Total Non-Current Liabilities, and Total Current Liabilities.
4. Equality Check: The Total Assets must equal the Total Capital and Liabilities.
This confirms the accounting equation: Assets = Capital + Liabilities. Worked Example (Preparation of a Balance Sheet): Mrs. Amaka's Provisions Store had the following balances as at 31st December 2023: | Item | Amount (₦) | | :------------------------ | :--------- | | Land & Buildings | 8,000,000 | | Inventory (Stock) | 1,200,000 | | Trade Receivables | 450,000 | | Cash at Bank | 150,000 | | Cash in Hand | 50,000 | | Bank Loan (due in 2 years)| 2,000,000 | | Trade Payables | 300,000 | | Capital (as at 1/1/2023) | 7,000,000 | | Net Profit for the year | 500,000 | | Drawings | 250,000 | Solution: Mrs. Amaka's Provisions Store Balance Sheet As at 31st December 2023 | ASSETS | ₦ | ₦ | | :---------------------------- | :-------------- | :-------------- | | Non-Current Assets: | | | | Land & Buildings | | 8,000,000 | | | | | | Current Assets: | | | | Inventory | 1,200,000 | | | Trade Receivables | 450,000 | | | Cash at Bank | 150,000 | | | Cash in Hand | 50,000 | | | Total Current Assets | | 1,850,000 | | Drawings | 250,000 | Solution: Mrs. Amaka's Provisions Store Balance Sheet As at 31st December 2023 | ASSETS | ₦ | ₦ | | :---------------------------- | :-------------- | :-------------- | | Non-Current Assets: | | | | Land & Buildings | | 8,000,000 | | | | | | Current Assets: | | | | Inventory | 1,200,000 | | | Trade Receivables | 450,000 | | | Cash at Bank | 150,000 | | | Cash in Hand | 50,000 | | | Total Current Assets | | 1,850,000 | | TOTAL ASSETS | | 9,850,000 | | | | | | CAPITAL AND LIABILITIES | | | | Capital: | | | | Balance as at 1/1/2023 | 7,000,000 | | | Add: Net Profit | 500,000 | | | | 7,500,000 | | | Less: Drawings | (250,000) | | | Closing Capital | | 7,250,000 | | | | | | Non-Current Liabilities: | | | | Bank Loan (Long-term) | | 2,000,000 | | | | | | Current Liabilities: | | | | Trade Payables | 300,000 | | | Total Current Liabilities | | 300,000 | | TOTAL CAPITAL AND LIABILITIES | | 9,850,000 | --- 3.
1. Teacher Activities: Introduction (10 min): Begin by asking students what a business owns and what it owes. Introduce the concept of financial position and the need for a statement that captures this. Briefly introduce the Balance Sheet and its role.
Concept Explanation (20 min): Explain "Assets" thoroughly, giving real-life Nigerian examples for both non-current and current assets. Use visual aids like pictures of local businesses or items they would own (e.g., a keke napep for transport business, okada for courier service). Explain "Liabilities" similarly, with Nigerian examples for non-current and current liabilities (e.g., loan from a microfinance bank, money owed to market traders). Clarify "Owner's Equity" and its components (Capital, Net Profit/Loss, Drawings). Use a table to clearly distinguish between assets and liabilities.
Demonstration of Classification (15 min): Provide a list of various items (e.g., generator, bank overdraft, motor vehicle, stock of gari, loan from BOA, outstanding electricity bill) and guide students on how to classify them into the appropriate asset/liability categories. Demonstration of Balance Sheet Preparation (25 min): Walk through the vertical format of the Balance Sheet step-by-step using the worked example provided in the Key Concepts section. Emphasise the importance of the heading, correct classification, and the accounting equation (equality of total assets and total capital + liabilities). Highlight common errors to avoid (e.g., mixing up current and non-current, incorrect calculation of closing capital).
Guided Practice Facilitation (15 min): Distribute guided practice questions and circulate to offer support, clarify doubts, and check student understanding.
Review and Consolidation (5 min): Summarise key learning points, reiterate the importance of the Balance Sheet, and preview the next steps. 3.
2. Student Activities: Active Listening and Note-Taking (Throughout): Students listen attentively, ask clarifying questions, and take comprehensive notes on definitions, classifications, and examples.
Participation in Discussions (15 min): Students contribute to discussions by suggesting examples of assets and liabilities from their daily lives or local businesses.
Classification Exercise (10 min): In pairs or small groups, students classify a given list of financial items into assets/liabilities and further into current/non-current.
Balance Sheet Construction (20 min): Students attempt to prepare a simple Balance Sheet individually or in groups after the teacher's demonstration.
Guided Practice Work (15 min): Students work on the guided practice questions, applying the concepts learned.
Question and Answer (Throughout): Students ask questions to seek clarification and answer questions posed by the teacher or peers. ---
Evaluating the Financial Health of Local Businesses (Community Integration): Students can be encouraged to think about a small business in their local community (e.g., a suya spot, a provision store, a tailoring shop). They can discuss what assets that business might own (e.g., grill, shop space, sewing machine, stock of fabric) and what liabilities it might have (e.g., loan from a local cooperative, money owed to suppliers). This exercise helps them understand how real-life economic activities are structured financially, fostering an appreciation for local entrepreneurship and community development. Personal Financial Planning (Economic Integration): The concept of a Balance Sheet can be linked to personal financial statements. Students can create a simple personal "net worth statement" listing their assets (e.g., savings, phone, bicycle, land owned by family) and liabilities (e.g., money owed to a friend, school fees loan). This teaches them the importance of tracking personal finances, managing debt, and building wealth, skills crucial for financial independence in Nigeria's dynamic economy. Understanding Public Company Reports (Financial Literacy & Investment): For more advanced students or as an extension, the teacher can bring simplified annual reports of Nigerian companies (e.g., banks, manufacturing firms) and point out their Balance Sheets. This demonstrates how large organisations present their financial position and how investors, including potential future Nigerian investors, use this information to make decisions. It connects classroom learning to the broader Nigerian financial market. ---