15. Balance sheet.

In the course of operations a corporation needs numerous reports and statements to provide a permanent record of its financial activities. These statements and reports are prepared by the corporation’s own staff and most are done in a standardized format. The US Securities and Exchange commission (SEC) requires the preparation of four basic financial statements which are: 1) a balance sheet, 2) an income statement, 3) a statement of retained earnings, and 4) a statement of changes in financial position.

The financial position of an accounting entity as of a specified moment in time is shown by a balance sheet. In fact, its formal name is statement of financial position. More speci6cally, the balance sheet reports the assets and equities and liabilities (liabilities and owner s equity) of the entity at the specified moment in time.

The balance sheet (the statement of financial position) is used to appraise the solvency of the firm and presents measures of the assets and equities (also called liabilities and owner's equity) in a business firm at a specific moment in time. The balance sheet is a statement of what a company owns its assets and what it owes its liabilities at a particular time. It consists of three major sections: assets, liabilities and the shareholder’s equity.

In the balance sheet below, the fixed assets are broken down into intangibles (such as patents and goodwill, entered in the books) and tangible assets (such as freehold property, land and equipment). The next heading is current assets and this is split into three: firstly stocks valued, then debtors (in other words outstanding payment for goods sold), and thirdly cash in the bank. Current assets consist of cash and other short-lived assets reasonably expected to be converted into cash or to be consumed or used up in the operations of the business within a short period, usually one year. Property, plant, and equipment refers to relatively long-lived assets that are to be used in the production or sale of other assets or services rather than being sold. The total of current assets is then reduced by the total of current liabilities, and represents amounts owing to creditors.

Liabilities are the debts owed by a firm. Typically, they must be paid at certain known moments in time. The short-lived liabilities may consist of accounts payable (amounts owed to suppliers) and notes payable (written promises to pay). Some firms may have long-term liabilities on their balance sheets. Such long-tern liabilities could include mortgages or bonds due in periods beyond one year.

Equity is represented by the final section of the balance sheet -capital and reserves. The share capital is topped up by a share premium account which is the difference between the above issued share value and the actual price of the shares.

The balance sheet heading includes the name of the organization, the title of the statement, and the date of the statement, also note that the claims upon or interests in assets equal the assets. Every transaction affects at least two items and preserves the fundamental equation: Assets = Liabilities + Owner's equity. The dual-aspect concept is evident from the fact that the assets listed on the left-hand side of a balance sheet are equal in total to the liabilities and shareholders equity listed on the right-hand side.