Additional material

TEXT 1. THE BALANCE SHEET

Financial statements are the final product of the accounting process. They provide information on the financial condition of a company. The balance sheet, one type of financial statement, provides a summary of what a company owns and what it owes on one particular day.

Assets represent everything of value that is owned by a business, such as property, equipment and accounts receivable. On the other hand, liabilities are the debts owed by a company – for example, to suppliers and banks. If liabilities are subtracted from assets (assets – liabilities), the amount remaining is the owners’ share of a business. This is known as owners’ or stockholders’ equity.

One key to understanding the accounting transactions of a business is to understand the relationship of its assets, liabilities, and owners’ equity. This is often represented by the fundamental accounting equation: assets equal liabilities plus owner’s equity.

Assets + Liabilities + Owners’ Equity

These three factors are expressed in monetary terms and therefore are limited to items that can be given a monetary value. The accounting equation always remains in balance; in other words, one side must equal the other.

The balance sheet expands the accounting equation by providing more information about the assets, liabilities, and owner’s equity of a company at a specific time (for example, on December 31, 2005). It is made up of two parts. The first part lists the company assets, and the second part details liabilities and owners’ equity. Assets are divided into current and fixed assets. Cash, accounts receivable, and inventories are all current assets. Property, buildings, and equipment make up the fixed assets of a company. The liabilities section of the balance sheet is often divided into current liabilities (such as accounts payable and income tax payable) and long-term liabilities (such as bonds and long-term notes).

The balance sheet provides a financial picture of a company on a particular date, and for this reason it is useful in two important areas. Internally, the balance sheet provides managers with financial information for company decision-making. Externally, it gives potential investors data for evaluation of the company’s financial position.

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