Balance sheet - JSS3 Business studies Past Questions and Answers - page 2

A balance sheet is a financial statement that shows what a company owns and owes at a specific point in time. It's important because it helps investors, creditors, and management assess the company's financial position and make informed decisions.

Current assets are assets expected to be converted into cash or used up within one year, like cash, accounts receivable, and inventory. Non-current assets, on the other hand, are assets expected to provide economic benefits beyond one year, such as property, plant, and equipment.

Liabilities represent the company's obligations, while equity represents the owners' stake in the company. The relationship is important because it shows how the company's assets are financed – either through debts (liabilities) or investments by shareholders (equity).

Retained earnings represent the accumulated profits that have not been distributed as dividends. They reflect the company's ability to generate profits and reinvest them for growth. Higher retained earnings indicate better financial performance and potential for future growth.

Maintaining a balance between assets and liabilities ensures the company can meet its financial obligations and continue operating smoothly. Too many liabilities relative to assets could indicate financial risk, while too few liabilities might mean the company is not leveraging enough for growth.

Explanation:

• Cash: Increased by ₦50,000 investment and ₦5,000 from accounts receivable. Total cash is now ₦65,000.
• Accounts Receivable: Received ₦5,000, so accounts receivable increased to ₦7,000.
• Inventory: No change, remains at ₦8,000.
• Accounts Payable: Increased by ₦8,000 due to inventory purchase.
• Short-term Loans: No change, as no transactions related to short-term loans occurred.
• Accrued Expenses: No change, as no transactions related to accrued expenses occurred.
• Equipment: Increased by ₦20,000 due to equipment purchase.
• Share Capital: No change, remains at ₦50,000.
• Retained Earnings: Increased by the difference between total assets and total liabilities and equity, which is ₦100,000 - ₦67,000 = ₦33,000.
• Reserves: No transactions occurred, so remains at ₦0.