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Accountancy
Key concepts
Financial statements
Auditing
Fields of accounting
A standard company balance sheet has three parts: assets, liabilities and ownership
equity. The main categories of assets are usually listed first, and typically in order of
liquidity.[2] Assets are followed by the liabilities. The difference between the assets and
the liabilities is known as equity or the net assets or the net worth or capital of the
company and according to the accounting equation, net worth must equal assets minus
liabilities.[3]
Another way to look at the same equation is that assets equals liabilities plus owner's
equity. Looking at the equation in this way shows how assets were financed: either by
borrowing money (liability) or by using the owner's money (owner's equity). Balance
sheets are usually presented with assets in one section and liabilities and net worth in the
other section with the two sections "balancing."
Records of the values of each account or line in the balance sheet are usually maintained
using a system of accounting known as the double-entry bookkeeping system.
A business operating entirely in cash can measure its profits by withdrawing the entire
bank balance at the end of the period, plus any cash in hand. However, many businesses
are not paid immediately; they build up inventories of goods and they acquire buildings
and equipment. In other words: businesses have assets and so they can not, even if they
want to, immediately turn these into cash at the end of each period. Often, these
businesses owe money to suppliers and to tax authorities, and the proprietors do not
withdraw all their original capital and profits at the end of each period. In other words
businesses also have liabilities.
Contents
[hide]
• 1 Origin
• 2 Types
o 2.1 Personal balance sheet
o 2.2 US small business balance sheet
• 3 Public Business Entities balance sheet structure
o 3.1 Assets
o 3.2 Liabilities
o 3.3 Equity
• 4 Sample balance sheet structure
• 5 See also
• 6 References
[edit] Origin
It was the Flemish mathematician Simon Stevin who persuaded merchants to make it a
rule to summarize accounts at the end of every year in a chapter entitled
Coopmansbouckhouding op de Italiaensche wyse (Dutch: "Commercial Book-keeping in
the Italian Way") of his Wisconstigheg hedachtenissen (Dutch: "Mathematical memoirs",
Leiden, 1605-08). Although the balance sheet he required every enterprise to prepare
every year was based on entries of the ledger, it was prepared separately from the major
books of account. The oldest semi-public balance sheet recorded was that of the East
India Company dated 30th April 1671, which was submitted to the company's General
Meeting on in 30th August 1671. The publication and audit of the balance sheet was still
a rarity in England until the passing of the Bank Charter Act 1844.[4]
[edit] Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at
a specific point in time. Individuals and small businesses tend to have simple balance
sheets.[5][dead link] Larger businesses tend to have more complex balance sheets, and these
are presented in the organization's annual report.[6] Large businesses also may prepare
balance sheets for segments of their businesses.[7] A balance sheet is often presented
alongside one for a different point in time (typically the previous year) for comparison.[8]
[9][dead link]
Accounts Payable
A really small business balance sheet lists current assets such as cash, accounts
receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible
assets such as patents, and liabilities such as accounts payable, accrued expenses, and
long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the
balance sheet. The small business's equity is the difference between total assets and total
liabilities.[12]
Balance sheet account names and usage depend on the organization's country and the
type of organization. Government organizations do not generally follow standards
established for individuals or businesses.[13][dead link][14][15][dead link][16][17]
If applicable to the business, summary values for the following items should be included
on the balance sheet:[18]
[edit] Assets
Current assets
Fixed assets
[edit] Liabilities
1. Accounts payable
2. Provisions for warranties or court decisions
3. Financial liabilities (excluding provisions and accounts payable), such as
promissory notes and corporate bonds
4. Liabilities and assets for current tax
5. Deferred tax liabilities and deferred tax assets
6. Minority interest in equity
7. Issued capital and reserves attributable to equity holders of the Parent company
8. Unearned revenue for services paid for by customers but not yet provided
[edit] Equity
The net assets shown by the balance sheet equals the third part of the balance sheet,
which is known as the shareholders' equity. Formally, shareholders' equity is part of the
company's liabilities: they are funds "owing" to shareholders (after payment of all other
liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities
excluding shareholders' equity. The balance of assets and liabilities (including
shareholders' equity) is not a coincidence. Records of the values of each account in the
balance sheet are maintained using a system of accounting known as double-entry
bookkeeping. In this sense, shareholders' equity by construction must equal assets minus
liabilities, and are a residual.
1. Numbers of shares authorized, issued and fully paid, and issued but not fully paid
2. Par value of shares
3. Reconciliation of shares outstanding at the beginning and the end of the period
4. Description of rights, preferences, and restrictions of shares
5. Treasury shares, including shares held by subsidiaries and associates
6. Shares reserved for issuance under options and contracts
7. A description of the nature and purpose of each reserve within owners' equity
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable (debtors)
Inventories
Prepaid Expenses
Investments held for trading
Other current assets
Creditors: amounts falling due after more than one year (Long-Term
Liabilities)
Bank loans
Issued debt securities
Deferred tax liability
Provisions
Minority interest
Equity
Share capital
Capital reserves
Revaluation reserve
Translation reserve
Retained earnings
The balance sheet identity is one the most elementary lessons of accounting.
However, students learning introductory accounting often find it difficult to grasp
in its standard form. Learn how to rearrange the balance sheet identity to make
more sense to the beginning accounting student.
At first glance, this relationship does not seem intuitive. How can the assets of a
corporation equal the addition of stockholders’ equity and liabilities? A little
algebra and the identity comes to light. Solving the equation for stockholders’
equity is the key. If we subtract liabilities from both sides we get:
The equation now makes much more intuitive sense. Stockholders’ Equity is a
residual representation formed by subtracting what the company owes (liabilities)
from what it is worth (assets). This equation reveals that the addition of assets
(such as cash, accounts receivable, inventory, etc.) increases stockholders’
equity and the addition of liabilities (such as accounts payable, notes payable,
and long-term bonds) decrease stockholders’ equity.
The left hand side of the balance sheet represents the investment decisions of
the organization and the right hand side represents the financing decisions.
Liabilities are considered a financing option because it is a method of bringing
money into the organization to finance its operations. Stockholders’ equity is
whatever is left over if the assets of an organization outweigh its liabilities. When
current liabilities (short-term debt) outweigh current assets (liquid assets), a firm
is in default of its obligations and usually files for bankruptcy unless an alternative
method of paying off its creditors can be found.
Read more:
http://www.brighthub.com/office/finance/articles/16013.aspx#ixzz0fJlsajm2
Overview: Assets and Liabilities are the two core elements that make up the balance
sheet of a corporation. Being able to understand these numbers can help you make better
decisions. And you should be able to do better than say "Assets are on the left; liabilities
are on the right of the balance sheet." The article gives certain balance sheet basics that
will help the company and the interested parties like the investors, auditors, directors’ etc
to use a company's assets and liabilities information effectively and in an easily
understandable manner.
In banking, asset and liability management is the practice of managing risks that arise
due to mismatches between the assets and liabilities (debts and assets) of the bank. This
can also be seen in insurance.
Banks face several risks such as the liquidity risk, interest rate risk, credit risk and
operational risk. Asset Liability management (ALM) is a strategic management tool to
manage interest rate risk and liquidity risk faced by banks, other financial services
companies and corporations.
Banks manage the risks of Asset liability mismatch by matching the assets and liabilities
according to the maturity pattern or the matching the duration, by hedging and by
securitization. Much of the techniques for hedging stem from the delta hedging concepts
introduced in the Black-Scholes model and in the work of Robert C. Merton and Robert
A. Jarrow. The early origins of asset and liability management date to the high interest
rate periods of 1975-6 and the late 1970s and early 1980s in the United States. Van
Deventer, Imai and Mesler (2004), chapter 2, outline this history in detail.
Modern risk management now takes place from an integrated approach to enterprise risk
management that reflects the fact that interest rate risk, credit risk, market risk, and
liquidity risk are all interrelated. The Jarrow-Turnbull model is an example of a risk
management methodology that integrates default and random interest rates. The earliest
work in this regard was done by Robert C. Merton. Increasing integrated risk
management is done on a full mark to market basis rather than the accounting basis that
was at the heart of the first interest rate sensivity gap and duration calculations.
This equation is also the framework for keeping track of money as it flows in and out of your
company. Starting with the first penny you earn, you'll record in a general ledger each and every
transaction using a double-entry system of debits and credits. Assets get recorded on the top or
the left side of the balance sheet; liabilities and owners' equity are recorded on the bottom or the
right side of the balance sheet.
The information on each company's general ledger is unique to that business; however, all
companies classify their general ledger accounts as assets, liabilities or owners' equity.
Businesses use more specific accounts within each classification, for example, "current assets" or
"long-term liabilities," to organize and track their finances.
Assets
An asset is anything of value that your company owns — including cash. Assets get recorded on
the balance sheet in terms of their dollar values. Remember, even if you used credit to purchase
an asset, you still own it. Its full dollar value gets recorded on one side of the balance sheet as an
asset, and the amount you owe gets recorded on the other side of the balance sheet as a liability.
There are several types of assets:
• Current assets. These are assets with dollar amounts that continually change, for
example, cash, accounts receivable, inventory or raw materials your company uses to make a
product. They are listed on the balance sheet in order of their liquidity, or how fast they can be
converted into cash.
• Investments. Companies, like individuals, can own securities such as stocks and
bonds. Investments, like cash or property, are considered assets.
• Capital assets. Think of capital assets, also called plant assets, as permanent things
your company owns. Land, buildings, equipment and vehicles are common capital assets. So
are things like computers, furniture and appliances, as long as they remain for use within your
business and are not items you sell.
• Intangible assets. Patents, copyrights and other nonmaterial assets that have value are
referred to as intangible.
Liabilities
Anything a company owes to people or businesses other than its owners is considered a liability.
There are two types of liabilities:
• Long-term liabilities. A long-term liability is any debt that extends beyond one year,
such as a mortgage.
Owners' Equity
Owners' equity, also called capital, is any debt owed to the business owners. For example, if you
invested $50,000 of your savings to start a business, that amount is recorded in a capital account,
also referred to as an owners'-equity account. In publicly traded companies, outstanding preferred
and common stock also represents owners' equity.
Your business's revenues and expenses are also recorded in capital accounts because they
relate to how much money your company makes over a period of time. At the end of each
accounting cycle, a business' profits get transferred to a capital account
When you study the figures of a target company it is worth examining its current
assets and current liabilities.
Current assets represent assets that can be quickly transferred into money. Some
of them are:
• Cash
• Cash equivalents
• Inventories
• Accounts receivable (these are the
money that customers owe to the
company for services or products
provided)
Current liabilities represent the short term obligations of the company. Some of
them are:
• Accounts payable
• Short term debt
Current assets and current liabilities should be compared over periods of time. It is
good if the current assets have increased significantly over longer periods of time.
This means that the company generates cash. On the other hand, it can be also
interpreted as the company not being able to collect the money it has to take from
its accounts receivable. If the current liabilities of the company are growing at a fast
pace, then there might be some problem with the company. However, this is not
always bad since the company may incur higher liabilities since it needs money to
finance some of its goals.
Finally, you should carefully study these indicators of the target company in order to
determine its future potentials. You can quickly and easily obtain this information
from financial statements.
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Generally, assets and liabilities are terms used in economics and accounting. Assets are everything of value
owned by a person or company. They represent property that might include cash, bank deposits, stocks or a
house. Liabilities on the other hand, are a financial obligation that legally binds an individual or company to
settle a debt. Assets and liabilities together determine the wealth of an individual, firm or a nation.
In a loan approval process, liquid assets are considered an important factor because they are required for
the down payment, closing costs, prepaid, and cash reserves after the closing of a loan.
Current Liabilities
Investing Lesson 3 - Analyzing a Balance Sheet
• debt to equity
• debt management
• investing research
• income statements
• financial ratios
Current liabilities represent money a company owes for its debts or liabilities in the next twelve months. The
biggest current liability is most often accounts payable, which is money owed to vendors for goods or services
provided to the company.
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Balance Sheet Short Term Loans Debt to Equity Stock Investing Current Liabilities
Current liabilities are the debts a company owes which must be paid within one year. They are
the opposite of current assets. Current liabilities includes things such as short term loans,
accounts payable, dividends and interest payable, bonds payable, consumer deposits, and
reserves for Federal taxes.
Let's take a look at some of the most common and important current liabilities on the balance
sheet.
Accounts payable is the opposite of accounts receivable. It arises when a company receives a
product or service before it pays for it. Accounts payable, or A/P as it is often shorthanded, is
one of the largest current liabilities a company will face because they are constantly ordering
new products or paying vendors for services or merchandise. Really well managed companies
attempt to keep accounts payable high enough to cover all existing inventory, meaning that
the vendors are paying for the company's shelves to remain stocked, in effect.
This item in the current liabilities section of the balance sheet represents money owed to
employees as salary and bonus that the company has not yet paid.
These current liabilities are sometimes referred to as notes payable. They are the most
important item under current liabilities section of the balance sheet and most of the time, they
represent the payments on a company's bank loans that are due in the next twelve months.
Borrowing money in itself is not necessarily a sign of financial weakness; an intelligent
department store executive may work out short term loans at Christmas so she can stock up
on merchandise before the Holiday rush. If demand is high, the store would sell all of its
inventory, pay back the short term loans, and pocket the difference. This is known as utilizing
leverage. The department store used borrowed money to make a profit.
So how can you ever hope to tell if a company is wisely borrowing money (such as our
department store), or recklessly going into debt? Look at the amount of notes payable on the
balance sheet (if they aren't classified under 'notes payable', combine the company's short
term obligations and long term current debt). If the amount of cash and cash equivalents is
much larger than the notes payable, you shouldn't have any reason to be concerned.
If, on the other hand, the notes payable has a higher value than the cash, short term
investments, and accounts receivable combined, you should be seriously concerned. Unless
the company operates in a business where inventory can quickly be turned into cash, this is a
serious sign of financial weakness.
Depending on the company, you will see various other current liabilities listed. Sometimes
they will be lumped together under the title "other current liabilities." Normally, you can find a
detailed listing of what these "other" liabilities are buried somewhere in the annual report or
10k. Often, you can figure out the meaning of the entry by its name. If a business lists
"Commercial Paper" or "Bonds Payable" as a current liability, you can be fairly confident the
amount listed is what will be paid out to the company's bond holders in the short term.
Consumer Deposits Are Liabilities to Banks
If you are looking at the balance sheet of a bank, you will want to pay close attention to an
entry under the current liabilities called "Consumer Deposits". Often, they will be will lumped
under other current liabilities. This is the amount that customers have deposited in the bank.
Since, theoretically, all of the account holders could withdrawal all of their funds at the same
time, the bank must list the deposits as a current liability.
Current Liabilities
Investing Lesson 3 - Analyzing a Balance Sheet
• debt to equity
• debt management
• investing research
• income statements
• financial ratios
Current liabilities represent money a company owes for its debts or liabilities in the next twelve months. The
biggest current liability is most often accounts payable, which is money owed to vendors for goods or services
provided to the company.
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Balance Sheet Short Term Loans Debt to Equity Stock Investing Current Liabilities
Current liabilities are the debts a company owes which must be paid within one year. They are
the opposite of current assets. Current liabilities includes things such as short term loans,
accounts payable, dividends and interest payable, bonds payable, consumer deposits, and
reserves for Federal taxes.
Let's take a look at some of the most common and important current liabilities on the balance
sheet.
This item in the current liabilities section of the balance sheet represents money owed to
employees as salary and bonus that the company has not yet paid.
These current liabilities are sometimes referred to as notes payable. They are the most
important item under current liabilities section of the balance sheet and most of the time, they
represent the payments on a company's bank loans that are due in the next twelve months.
Borrowing money in itself is not necessarily a sign of financial weakness; an intelligent
department store executive may work out short term loans at Christmas so she can stock up
on merchandise before the Holiday rush. If demand is high, the store would sell all of its
inventory, pay back the short term loans, and pocket the difference. This is known as utilizing
leverage. The department store used borrowed money to make a profit.
So how can you ever hope to tell if a company is wisely borrowing money (such as our
department store), or recklessly going into debt? Look at the amount of notes payable on the
balance sheet (if they aren't classified under 'notes payable', combine the company's short
term obligations and long term current debt). If the amount of cash and cash equivalents is
much larger than the notes payable, you shouldn't have any reason to be concerned.
If, on the other hand, the notes payable has a higher value than the cash, short term
investments, and accounts receivable combined, you should be seriously concerned. Unless
the company operates in a business where inventory can quickly be turned into cash, this is a
serious sign of financial weakness.
Depending on the company, you will see various other current liabilities listed. Sometimes
they will be lumped together under the title "other current liabilities." Normally, you can find a
detailed listing of what these "other" liabilities are buried somewhere in the annual report or
10k. Often, you can figure out the meaning of the entry by its name. If a business lists
"Commercial Paper" or "Bonds Payable" as a current liability, you can be fairly confident the
amount listed is what will be paid out to the company's bond holders in the short term.
If you are looking at the balance sheet of a bank, you will want to pay close attention to an
entry under the current liabilities called "Consumer Deposits". Often, they will be will lumped
under other current liabilities. This is the amount that customers have deposited in the bank.
Since, theoretically, all of the account holders could withdrawal all of their funds at the same
time, the bank must list the deposits as a current liability.