The balance sheet

I. Read the following words and word-combinations:

a specified time, assets, liabilities, equity, obviously, insurance, mortgage, a sole proprietorship, a partnership, a corporation, earned capital.

II. Read the text to find out the basic components of a balance sheet.

The balance sheet shows what a company owns (its assets) and the sources of financing these assets and operating activities by shareholders (equity) and by borrowing (liabilities). It is a "snapshot" of the company's financial position at a specified time. As a rule, the balance sheet consists of three major sections: assets, liabilities and owner’s equity.

It should be said that these three sections are arranged differently from country to country. In the USA and many European countries, the assets appear on the left-hand side of the page and the liabilities on the right. In Britain these sections are arranged vertically.

Assets. The assets of a company are often divided into two categories: current assets and non-current (fixed) assets. These categories are listed in the order of their liquidity (the ease with which an asset can be converted into cash). Current assets are more liquid than non-current assets.

Current assets can be defined in the following way: cash or other assets that are reasonably expected to be realised in cash or sold during a normal operating cycle of a business or within one year if the operating cycle is shorter than one year. Cash is obviously a current asset. Temporary investments, accounts and notes receivable, and inventory are also current assets because they may be converted to cash within the next year or during the normal operating cycle of most firms. Prepaid expenses such as rent and insurance paid for in advance, and inventories of various supplies bought for use rather than for sale should be classified as current assets. To make a long story short, current assets are a list of all the assets owned by the business which have a life expectancy of less than one year. For example, inventories (stock of goods), trade and other receivables, prepayments, cash etc. are also current assets.

Non-current assets include: property, plant and equipment, fixed assets normally stated at net book value (cost of purchase less accumulated depreciation). The assets which are expected to remain in the balance sheet more than one year fall into non-current assets category too.

Liabilities are made up of mortgages, payable long-term notes, bonds payable, employee pensions, long-term and current obligations. They are also split into current and non-current (long-term) liabilities. Current liabilities usually consist of overdrafts, taxes due, but not yet paid, and goods supplied on credit. Non-current or long-term liabilities comprise debts of a business that fall due more than one year ahead, beyond the normal operating cycle, or are to be paid out of non-current assets.

Owner's equity can be defined as the resources invested by the business. To put it differently, "owner's equity = assets – liabilities". It should be noted that the owner's equity section of the balance sheet will be different depending on whether the business is a sole proprietorship, a partnership, or a corporation. The owner's equity section of a corporation is called stockholders' equity and has two parts: contributed or paid-in capital and earned capital or retained earnings.

Comments

assets – активи

liabilities – пасиви

equity, owner’s equity – власний капітал

current assets – поточні активи, оборотний капітал, основні фонди

fixed assets – основний капітал, основні фонди

mortgage [m:d] – іпотека, заставна (на нерухоме майно)

bond – облігація до виплати, боргове зобов’язання

bonds payable – облігації до виплати

employee pensions – пенсія працівника

long-term and current obligations – довгострокові та поточні зобов’язання

accounts and notes receivable – рахунки та векселі до отримання

inventory [nvntr] – запаси, резерв; інвентарна відомість

overdraft – овердрафт, перевищення кредиту (у банку)

a sole proprietorship – одноосібна власність

a partnership – товариство

a corporation – корпорація

a stockholder – акціонер

stockholders' equity – акціонерний (власний) капітал

II. Re-read the text, then look at the following statements. Which of them are true and which of them are false?

1. In different countries of the world the main sections of the balance sheet are arranged in the same way.

2. As a rule, assets are never listed in the order of the ease with which an asset can be converted into cash.

3. A current asset is an asset that can reasonably be expected to be realised in cash during the next year or normal operating cycle.

4. The investments category does not include long-term assets.

5. As is known, a current liability can't be expected to be paid during the next year or normal operating cycle.

6. The property, plant and equipment category includes long-term assets that are used in the continuing operation of the business.

7. Debts of a business that fall due more than one year ahead or beyond the normal operating cycle are generally short-term liabilities.

III. Re-read the text, then match the following accounting terms in the left-hand column with their definitions in the right-hand column.

1) balance sheet 1) the owner's equity section of a corporation's balance sheet;

2) assets 2) the resources invested by the owner of the business;

3) liabilities 3) an accounting statement of a firm's assets and liabilities;

4) stockholders' 4) items of property owned by a business or an equity individual which has a money value;

5) current liabilities 5) assets such as stocks, money owned by debtors;

6) owner's equity 6) items owned by an organisation for continued use, e.g. land and machinery;

7) fixed assets 7) claims on the resources of an individual or business in respect of money borrowed.

IV. Re-read the text to answer the following questions.

1. What is meant by a balance sheet?

2. What is the purpose of the balance sheet?

3. How many sections are there in the balance sheet?

4. Under what condition will an asset be considered current?

5. In what order should current assets be listed?

6. What do generally liabilities include?

7. What do current liabilities consist of?

8. What is usually understood by the term "owner's equity"?

9. What is the owner's section of a corporation called?