B. Accrued expenses

Because of the matching principle, under which transactions and other events are reported in the periods to which they relate and not when cash is received or paid, balance sheets usually include accrued expenses. These are expenses that have accumulated or built up during the accounting year but will not be paid until the following year, after the date of the balance sheet. So accrued expenses are charged against income - that is, deducted from profits - even though the bills have not yet been received or the cash paid. Accrued expenses could include taxes and utility bills, for example electricity and water.

C. Shareholders' equity on the balance sheet

Shareholders’ equity is recorded on the same part of the balance sheet as liabilities, because it is money belonging to the shareholders and not the company.

Shareholders’ equity includes:

§ the original share capital (money from stocks or shares issued by the company:

§ share premium: money made if the company sells shares at above their face value - the value written on them

§ retained earnings: profits from previous years that have not been distributed to shareholders

§ reserves: funds set aside from share capital and earnings, retained for emergencies or other future needs.

1. Are the following statements true or false? Find reasons for your answers in A, B and C opposite.

2. A current liability will be paid before the date of the balance sheet.

3. A liability that must be paid in 13 months time is classified as long-term.

4. A company’s accrued expenses are like money an individual saves to pay bills in the future.

5. Shareholders’ equity consists of the money paid for shares, and retained earnings.

6. If companies retain part of their profits, this money no longer belongs to the owners.

7. Companies can sell shares at a higher value than the one stated on them.