What you'll learn
The balance sheet forms a fundamental component of CIE IGCSE Accounting financial statements, tested extensively across Paper 1 and Paper 2. This revision guide covers the structure, presentation and preparation of balance sheets for sole traders, including the classification of assets and liabilities, calculation of capital employed, and the relationship between the income statement and balance sheet. Understanding balance sheet preparation is essential for success in the examination, as questions regularly require you to construct complete balance sheets from trial balances or incomplete records.
Key terms and definitions
Balance sheet — A financial statement showing the assets, liabilities and capital of a business at a specific point in time, demonstrating the accounting equation: Assets = Capital + Liabilities.
Non-current assets — Assets purchased for long-term use in the business (exceeding one year) to generate revenue, such as premises, machinery, motor vehicles and fixtures and fittings.
Current assets — Assets held for short-term use (typically converted to cash within one year) including inventory, trade receivables, and cash at bank/in hand.
Current liabilities — Amounts owed by the business due for payment within one year, such as trade payables, bank overdrafts, and accrued expenses.
Non-current liabilities — Long-term debts payable after more than one year, including mortgages and long-term bank loans.
Net current assets (Working capital) — The difference between current assets and current liabilities, calculated as: Current Assets – Current Liabilities. This indicates the short-term liquidity position of the business.
Capital employed — The total long-term finance used in the business, calculated as: Non-current Assets + Net Current Assets, or alternatively: Capital + Non-current Liabilities.
Core concepts
Structure and presentation of the balance sheet
The CIE IGCSE Accounting syllabus requires balance sheets to be presented in vertical format, following the International Accounting Standards (IAS) layout. The balance sheet has two main sections:
Section 1: Assets employed in the business
- Non-current assets (listed individually)
- Current assets (listed individually)
- Less: Current liabilities
- Equals: Net current assets
- Plus non-current assets gives: Net assets (or Capital Employed)
Section 2: Financed by
- Opening capital
- Add: Net profit for the year
- Less: Drawings
- Equals: Closing capital
- Add: Non-current liabilities
- Equals: Capital Employed
The balance sheet must balance, with Net Assets equalling Capital Employed. The date is critical — balance sheets are prepared "as at" a specific date, not "for the year ended."
Classification of assets
Non-current assets must be listed in order of permanence (least liquid first):
- Premises/Land and buildings
- Machinery
- Motor vehicles
- Fixtures and fittings
- Office equipment
Each non-current asset is shown at net book value (cost less accumulated depreciation). CIE examiners expect the calculation to be shown:
Cost: $XX,XXX
Less: Provision for depreciation: $(X,XXX)
Net book value: $XX,XXX
Current assets are listed in order of liquidity (least liquid first):
- Inventory (stock)
- Trade receivables (debtors)
- Prepaid expenses
- Bank (if positive balance)
- Cash
Provision for doubtful debts is deducted from trade receivables to show the net realizable value.
Classification of liabilities
Current liabilities include:
- Trade payables (creditors)
- Bank overdraft
- Accrued expenses
- Short-term loans (repayable within 12 months)
The subtotal after deducting current liabilities from current assets gives net current assets or working capital, a key indicator of business liquidity.
Non-current liabilities include:
- Mortgages
- Long-term bank loans (repayable after more than one year)
These are added after the capital section to reach the final capital employed figure.
The capital section
The capital section reconciles opening and closing capital:
Capital at start of year: $X,XXX
Add: Net profit (transferred from income statement): $X,XXX
Add: Additional capital introduced: $X,XXX
Subtotal: $XX,XXX
Less: Drawings: $(X,XXX)
Capital at end of year: $XX,XXX
Net profit comes directly from the income statement, creating the essential link between the two financial statements. Drawings represent the owner's withdrawals for personal use and reduce capital.
Relationship with the income statement
The balance sheet and income statement are interconnected:
- Net profit from the income statement transfers to the capital section of the balance sheet
- Closing inventory appears as the final item in the income statement's cost of sales calculation and as the first current asset in the balance sheet
- Adjustments made in the income statement (accruals, prepayments, depreciation, provision for doubtful debts) affect the corresponding balance sheet items
The balance sheet reflects the cumulative effect of all transactions from the business's inception, while the income statement shows performance for a single accounting period.
The accounting equation
Every balance sheet demonstrates the fundamental accounting equation:
Assets = Capital + Liabilities
This can be rearranged as: Assets – Liabilities = Capital (shown as Net Assets in Section 1)
Understanding this equation helps check the accuracy of balance sheet preparation. If the balance sheet doesn't balance, errors exist in the ledger accounts or calculations.
Preparation from a trial balance
CIE examination questions frequently provide a trial balance and require balance sheet preparation. The systematic approach:
- Identify all non-current assets from the trial balance
- Calculate net book values by deducting provisions for depreciation
- List current assets in the correct order, applying any adjustments
- List current liabilities and calculate net current assets
- Calculate net assets/capital employed
- Complete the capital section using the capital balance, net profit (calculated separately in the income statement), and drawings
- Add non-current liabilities to reach the final capital employed figure
- Verify that both sections balance
Worked examples
Example 1: Basic balance sheet preparation
Sarah Chen runs a retail business. The following balances were extracted from her books on 31 December 2023:
| $ | |
|---|---|
| Premises | 85,000 |
| Motor vehicles | 24,000 |
| Inventory | 8,400 |
| Trade receivables | 5,600 |
| Bank | 2,150 |
| Cash | 350 |
| Trade payables | 4,200 |
| Capital at 1 January 2023 | 98,000 |
| Drawings | 18,200 |
Additional information: Net profit for the year was $15,700.
Required: Prepare Sarah Chen's balance sheet as at 31 December 2023.
Solution:
Sarah Chen
Balance Sheet as at 31 December 2023
| $ | $ | |
|---|---|---|
| Non-current assets | ||
| Premises | 85,000 | |
| Motor vehicles | 24,000 | |
| 109,000 | ||
| Current assets | ||
| Inventory | 8,400 | |
| Trade receivables | 5,600 | |
| Bank | 2,150 | |
| Cash | 350 | |
| 16,500 | ||
| Less: Current liabilities | ||
| Trade payables | 4,200 | |
| Net current assets | 12,300 | |
| Net assets | 121,300 | |
| Financed by: | ||
| Capital at 1 January 2023 | 98,000 | |
| Add: Net profit | 15,700 | |
| 113,700 | ||
| Less: Drawings | (18,200) | |
| Capital at 31 December 2023 | 95,500 |
Note: This balance sheet does not balance because there is missing information. The net assets of $121,300 should equal the capital. The difference of $25,800 indicates either non-current liabilities exist or the capital figure needs verification. Always check that both sections balance.
Example 2: Balance sheet with depreciation and adjustments
Michael Santos provides the following information on 31 March 2024:
| $ | |
|---|---|
| Equipment at cost | 36,000 |
| Provision for depreciation: Equipment | 14,400 |
| Fixtures at cost | 18,000 |
| Provision for depreciation: Fixtures | 5,400 |
| Inventory | 12,300 |
| Trade receivables | 8,900 |
| Provision for doubtful debts | 450 |
| Prepaid insurance | 380 |
| Cash at bank | 4,670 |
| Trade payables | 6,800 |
| Accrued rent | 520 |
| Mortgage (repayable 2030) | 25,000 |
| Capital at 1 April 2023 | 45,000 |
| Net profit for year | 19,680 |
| Drawings | 12,000 |
Required: Prepare the balance sheet as at 31 March 2024. (15 marks)
Solution:
Michael Santos
Balance Sheet as at 31 March 2024
| $ | $ | $ | |
|---|---|---|---|
| Non-current assets | Cost | NBV | |
| Equipment | 36,000 | (14,400) | 21,600 |
| Fixtures | 18,000 | (5,400) | 12,600 |
| 34,200 | |||
| Current assets | |||
| Inventory | 12,300 | ||
| Trade receivables | 8,900 | ||
| Less: Provision for doubtful debts | (450) | 8,450 | |
| Prepaid insurance | 380 | ||
| Bank | 4,670 | ||
| 25,800 | |||
| Less: Current liabilities | |||
| Trade payables | 6,800 | ||
| Accrued rent | 520 | 7,320 | |
| Net current assets | 18,480 | ||
| Net assets | 52,680 | ||
| Financed by: | |||
| Capital at 1 April 2023 | 45,000 | ||
| Add: Net profit | 19,680 | ||
| 64,680 | |||
| Less: Drawings | (12,000) | ||
| Capital at 31 March 2024 | 52,680 | ||
| Add: Non-current liabilities | |||
| Mortgage | 25,000 | ||
| Capital employed | 77,680 |
Wait — correction needed: Net assets ($52,680) should equal Capital + Non-current liabilities. Let me recalculate:
Net assets = Non-current assets + Net current assets = $34,200 + $18,480 = $52,680
Capital employed = Capital + Non-current liabilities = $52,680 + $25,000 = $77,680
The error: Net assets should be $77,680. Rechecking the calculation reveals the correct approach:
Net assets = Non-current assets + Current assets - Current liabilities = $34,200 + $25,800 - $7,320 = $52,680
This equals closing capital only. The mortgage should not be added to capital employed in Section 2 unless we're using the alternative presentation where:
Capital employed = Non-current assets + Net current assets = $52,680
And this equals capital of $52,680 (without adding non-current liabilities). The alternative format adds non-current liabilities to both sections.
Common mistakes and how to avoid them
• Mistake: Listing assets and liabilities in incorrect order (e.g., cash before inventory, or motor vehicles before premises).
Correction: Non-current assets are listed in order of permanence; current assets in order of liquidity (inventory, receivables, bank, cash). Memorize the standard sequence tested by CIE examiners.
• Mistake: Showing non-current assets at cost only, without deducting accumulated depreciation.
Correction: Always calculate and show net book value: Cost less Provision for depreciation. CIE mark schemes award separate marks for showing the calculation.
• Mistake: Forgetting to deduct provision for doubtful debts from trade receivables.
Correction: Trade receivables must be shown net: Trade receivables minus Provision for doubtful debts. This shows the realistic amount expected to be collected.
• Mistake: Confusing the balance sheet date format, writing "for the year ended" instead of "as at."
Correction: Balance sheets show the position at a specific moment in time, so always use "as at 31 December 2023" (or the relevant date). Income statements use "for the year ended."
• Mistake: Failing to transfer net profit from the income statement to the capital section.
Correction: Net profit (or net loss) must be added to (or subtracted from) opening capital. This is the crucial link between the two financial statements. Check this transfer carefully.
• Mistake: Placing bank overdrafts in current assets instead of current liabilities.
Correction: A bank overdraft is money owed to the bank, so it's a current liability. A positive bank balance is a current asset. Check whether the bank balance is debit (asset) or credit (liability).
Exam technique for "Financial Statements: Balance Sheet"
• Command words: "Prepare" or "Complete" the balance sheet requires full presentation with proper headings, correct classification, and accurate totaling. "State" or "Identify" requires only the item name without full presentation. CIE examiners deduct marks for missing headings (business name, statement type, date) — allocate 1-2 marks for proper format.
• Mark allocation: Typically 10-20 marks for balance sheet preparation in Paper 1. Marks are awarded for: correct headings (2-3 marks), proper classification of each item (1 mark each), accurate calculations (1 mark per subtotal), and balanced final totals (1-2 marks). Show all workings for depreciation and provisions — method marks are available even if the final answer is incorrect.
• Time management: A 15-mark balance sheet should take approximately 18 minutes. Structure your answer systematically: list all non-current assets first, then current assets, then liabilities, then capital section. This reduces errors and ensures you don't omit items.
• Checking your work: Always verify that Net Assets equals Capital Employed. If they don't balance, check: (1) Have you included all items from the question? (2) Are calculations correct? (3) Is net profit correctly transferred? (4) Are non-current liabilities in the right section? CIE examiners report that unbalanced balance sheets are the most common reason for lost marks.
Quick revision summary
The balance sheet shows assets, liabilities and capital at a specific date. Present non-current assets (at net book value) first, then current assets, less current liabilities to calculate net current assets. Add non-current assets and net current assets to show net assets. The financed by section starts with opening capital, adds net profit (from the income statement), deducts drawings to show closing capital, then adds non-current liabilities to equal capital employed. Both sections must balance. Remember: Assets = Capital + Liabilities.