Balance Sheet
Constructing a Simple Balance Sheet
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Worked Example: Grape Vines Ltd
Below is a sample question for Grape Vines Ltd. This page goes through the step-by-step process of constructing a Balance Sheet from information provided by a trial balance.
Grape Vines Ltd After Closing Trial Balance as at 30 June 2020
Share capital 700,000
Asset revaluation reserve 11,500
General Reserve 47,000
Retained Earnings 411,000
Cash at bank 360,000
Accounts receivable 40,000
Accrued interest income 7,000
Inventory 203,000
Prepaid expenses 5,000
Land 300,000
Plant and equipment 207,000
Accumulated depreciation of plant and equipment 17,000
Goodwill 29,000
Shares in companies 100,000
Accounts payable 5,000
Accrued expenses 1,500
Income tax payable 3,000
Unearned Income 2,000
Debentures 13,000
Mortgage loan 40,000
Note: The investments (share in companies) are expected to be owned for more than 12 months . The debentures are repayable within 12 months.
Prepare a balance sheet for Grape Vines Ltd as at 30 June 2020.
Step 1: Classify the Accounts
The first step is to classify the accounts provided into the appropriate Asset and Liability sections they belong to in the balance sheet:
Current Assets:
To recap, these are cash and other assets that will be consumed or concerted into cash within 12 months. Therefore in this question, the following accounts are classified as current assets:
Cash at bank
Accounts receivable
Accrued interest income
Inventory
Prepaid expenses.
Non-Current Assets:
These are assets that will bring a future benefit to the business for more than 12 months of the current balance sheet date.
The following accounts are classified as non-current assets:
Land
Plant and equipment (Less accumulated depreciation)
Goodwill
Shares in Other Companies (these are expected to be owned for more than 12 months).
Current Liabilities:
Those debts that will be settled within 12 months of the current balance sheet date. The following accounts are classified as current liabilities:
Accounts payable
Accrued expenses
Income tax payable
Unearned income
Debentures
Non-current Liabilities:
Those debts that will not be settled within 12 months of the current balance sheet date. The following accounts are classified as non-current liabilities:
Mortgage loan.
Long-term loans
Step 2: Assets - Consolidate the Account Balances from the Trial Balance to the Appropriate Line Classifications.
1) Assign the account balances from the trial balance to the appropriate standard line classifications: Below shows the line classification with the consolidated accounts in brackets.
Current Assets:
Cash and Cash Equivalents (Cash at bank)
Receivables (Accounts Receivable, Accrued Interest)
Inventories (Inventory)
Other Current Assets (Prepaid Expenses)
Non-Current Assets:
Investments: (Shares in Companies)
Property, Plant and Equipment (Land, Plant and Equipment less Accumulated Depreciation)
Other Intangible Assets – N/A
Goodwill
2) Calculate each line classification Current Assets:
Cash and cash equivalents= 360,000 (Cash at Bank)
Receivables= 40,000 (Accounts Receivable) + 7,000 (Accrued Interest) = 47,000
Inventories = 203,0000 - Other current assets = 5,000 (Prepaid Expenses)
Total Current assets: 360,000 + 47,000 + 203,000 + 5,000 = $ 615,000
Non-Current assets:
Investments = 100,000 (Shares in Companies)
Property, plant and equipment= 300,000 (Land)+ 207,000 (Plant and Equipment) - 17,000 (Less Accumulated Depreciation at Cost)= $ 490,000
Goodwill = 29,000 Total Non-Current Assets: 100,000 + 490,000 + 29,000 = $ 619,000
Total Assets: Total Current Assets + Total Non-Current Assets = 615,000 + 619,000 = $1,234,000
Step 3: Liabilities - Consolidate the Account Balances from the Trial Balance to the Appropriate Line Classifications.
1) Assign the account balances from the trial balance to the appropriate standard line classifications:
Current Liabilities:
Short-Term Borrowings: (Debentures - repayable within 12 months)
Payables (Accounts Payable, Accrued Expenses)
Income Tax Payable
Other Current Liabilities (Unearned Income)
Non-current Liabilities:
Long-Term Borrowings (Mortgage Loan)
2) Calculate each line classification
Current Liabilities:
Short-term borrowings= 13,000 (Debentures)
Payables= 5,000 (Accounts Payable) + 1,500 (Accrued Expenses) = 6,500
Income Tax Payable = 3,000
Other Current Liabilities= 2,000 (Unearned Income)
Total current liabilities= 13,000 + 6,500 +3,000 +2,000 = $ 24,500
Non-current liabilities:
Long-Term Borrowings= 40,000 (Mortgage Loan)
Total Non-Current Liabilities= $40,000
Total Liabilities: Total Current Liabilities + Total Non-Current Liabilities = 24,500 + 40,000 = $ 64,500.
Step 4: Completing the Equity Section of the Balance Sheet
To calculate net assets, subtract the total liabilities from the total assets Net assets = 1,234,000 - 64,500 = $ 1,169,500
1) Assign the account balances from the trial balance to the appropriate standard line classifications:
Equity:
Share Capital
Other components of Equity (Revaluation Reserve, General Reserve)
Retained Earnings
2) Calculate each line classification
Share Capital = 700,000
Other components of equity = 11,500 (Revaluation Reserve) + 47,000 (General Reserve) = 58,500
Retained earnings= 411,000
Total equity= 700,000 + 58,500 + 411,000 = 1,169,500.
Tip: One way to check if your balance sheet is correct is to see if your figure for total equity is identical to your figure for net assets. If they match, your balance sheet is in balance!