Thursday, March 27, 2008

The balance sheet, part I

This is the first of three articles about the balance sheet. I intend to give some core information about the balance sheet. Since the balance sheet is one of key parts of bookkeeping, i decided to start this series of articles to make it easier to catch the information.

Here's an example how a balance sheet looks like:

Assets Liabilities and Owners' Equity
Cash $ 27,600 Liabilities
Accounts Receivable 11,200 Notes Payable $ 64,000
Land 76,000 Accounts Payable $ 27,000
Buildings 89,000 Total liabilities $ 91,000
Tools and equipment 36,200 Owners' equity

Capital Stock

Retained Earnings

Total owners' equity $149,000
Total $240,000 Total $240,000

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, etc., that will bring future economic benefits. The other half shows the company's liabilities, and it's 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 pensions 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.

Shareholders' 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 include retained earnings: profits from previous years that have not been distributed - paid out to shareholders - as dividends. Shareholders' equity is the same as the company's net assets, or assets minus liabilities
A balance sheet does not show 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.

You can find the next part here.

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