The Balance Sheet 1

Assets, Liabilities and Capital

Company law in Britain, and the Securities and exchange commission in the US, require companies to publish annual balance sheets : statements for shareholders and creditors.
The balance sheet is a document which has two halves.
The totals of both halves are always the same, so they balance. One half shows a business’s assets. Which are things owned by the company, such as factories and machines. That will bring future economic benefits.

The other half shows the company’s liabilities and its capital or shareholders equity. Liabilities are obligations to pay other organizations or people : money that the company owes or will owe at a future date. These often include loans, taxes that will soon have to be paid, future pension payments to employees and bills from suppliers : companies which provide raw materials or parts. If the suppliers have given the buyer a period of time before they have to pay for the goods. This is known as granting credit. Since assets are shown as debits (as the cash or capital account was debited to purchase them), and the total must correspond with the total sum of the credits – that is the liabilities and capital – assets equal liabilities plus capital (or A=L+C).

American and continental European companies usually put assets on the left and capital and liabilities on the right. In britain, this was traditionally the other way round, but now most british companies use a vertical format, with assets at the top and liabilities and capital below.

Shareholder’s equity.

Shareholders equity consists of all the money belonging to shareholders. Part of this is share capital – the money the company raised by selling its shares. But shareholders equity also includes retained earnings : profits from previous years that have not been distributed – paid out to shareholders – as dividens. Shareholders equity is the same as the company’s net assets, or assets minus liabilities.

A balance sheet does not show how much money a company has spent or received during a year. This information is given in other financial statements : the profit and loss account and the cash flow statement.

Posted from WordPress for BlackBerry Novia.

Posted from WordPress for BlackBerry Novia.


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