Entrepreneurship – from ideas to reality
Entrepreneurship – from ideas to reality

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Entrepreneurship – from ideas to reality

3 Financial accounts

The term given to the day-to-day running costs and operational resources is ‘working capital’. A positive figure for working capital indicates that current assets (immediate cash and what is owed to the business) is greater than current liabilities (what is owed by the business). This will give a sense of security to suppliers and lenders. Working capital comprises cash held at the bank, the inventory (items held for re-sale) plus the cash due to be received from customers (receivables), less the cash due to be paid to suppliers (payables).

A balance sheet provides a summarised list of the assets and liabilities of a business, and its equity, at a particular moment in time. The terms are explained here:

  • Assets – things a business owns, or money owed to it.
  • Liabilities – financial obligations, or amounts of money the business owes to somebody else.
  • Equity (sometimes called ‘net worth’) – the assets minus liabilities, that is, the total remaining value of the business after all obligations are taken into account.

Depreciation is an accounting term used to allocate the cost of an asset over an appropriate number of years, usually equal to the time period of its ‘useful life’. Therefore, on the balance sheet, fixed assets (like plant or machinery) may appear with declining value in successive years.

The balance sheet is an indication of the business’ financial health, which means its ability to pay its bills when they fall due. It shows its cash resources and how much debt there is in relation to equity.

Example of a balance sheet
Figure 2Example of a balance sheet

A profit and loss account (p&l), sometimes known as an income statement, shows how a business has performed over a period of time. It measures whether or not the business is economically viable. It pulls together the sales revenues and expenses for a specific time, for example over a year or a month,to show whether a profit or loss was generated.

A spreadsheet showing an empty example of a profit and loss account.
Figure 3 Example of a business’ profit and loss account

The p&l (or income statement) shows the complete trading picture and business activities over time, including those sales made before the customers have paid cash for their purchases. As a result, expenses shown will include all costs and expenses incurred, including those for which the business may not yet have paid.

Sales revenue includes cash sales and sales made on credit terms. Cost of goods sold includes cash purchases and purchases made under credit terms.

The income statement is a basis for making business decisions and allows the business owners to see trends on sales, expenses and margins over time, and to make comparisons with previous periods and other similar businesses. It provides a basis for budgeting for the future.

Next you will look at limited companies.

ENT_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371