use of the capital introduced or share capital does not destroy it, or reduce its value. The capital remains intact, despite the alternative uses to which it has been put.
2.16 The use of the word “capital” in the above context refers to the value that the proprietors or shareholders have injected into the business, regardless of the particular net assets that the capital subsequently represents. Jane has introduced capital of £12,000 into the business in the form of cash. That cash is then used for various purposes.
2.17 The phrase “capital expenditure” refers to the investment made in fixed assets, that is the property, plant, equipment and other assets which are used within the business. Jane’s business has incurred capital expenditure of £1,200. If a decision is made that certain expenditure should be treated as a fixed asset, the phrase used is that the expenditure is “capitalised”. The aggregate of the fixed assets of a business at any point in time is sometimes referred to as the fixed capital. This is to differentiate it from working capital. 2.18 The phrase “working capital” refers to the aggregate of the stocks, the amounts owing by customers and the cash, as reduced by the amounts owing to customers and others, and any overdrafts. At the end of March Jane’s business had working capital of a total of £10,800. This is also called net current assets, that is the difference between the current assets and the current liabilities. 2.19 The “working capital cycle” refers to the fact that the resources within working capital can be pictured as going round in a circle: cash is paid for stocks, the stocks are sold to a customer, the customer takes some time but eventually pays for the goods, and the original cash, enhanced by the profit on the sale, finishes up back in cash. 2.20 Now we come to the part of accounts that non-accountants are most likely to find a challenge, namely the balance sheet. The clue in respect of a balance sheet is in the title - there is an expectation that it balances. It is in the act of the balancing of the accounts that there is certainty that the transactions going through the accounting records have been dealt with in some way. It does not provide any certainty that they have necessarily been dealt with in an appropriate way. The balance sheets at each month end are:
December January February
March
Van
-
1,100 _____
1,000 _____
900 ___
_____
Stocks
- -
7,000
5,600 2,000 1,500 1,800
7,000 3,000 1,500 3,300
Debtors: trade
-
Debtors: rent deposit
1,500 2,300
Cash
12,000
Creditors: trade Creditors: rent
-
-
-
(3,500)
(500)
(500)
(500)
______
______
______
______
6
Made with FlippingBook Learn more on our blog