The balance sheet

1. The balance sheet shows what a company own s (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 equity.

2. These three sections are arranged differently from country to country. In the USA and many European countries, the assets are on the left-hand side of the page and the liabilities on the right. In Britain these section s are arranged vertically.

3. Assets. The assets of a company are often divided into two categories: 1) current assets and 2) non-current assets. These categories are listed in the order of their presumed liquidity. Current assets are more liquid than non-current assets.

4. Current assets can be defined in the following way: cash or other assets that are expected to be realised in cash or sold during a normal operating cycle of a business or within one year if within one year 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.

Non-current assets include: property, plant and equipment, fixed assets. The assets which are expected to remain in the balance sheet more than one year fall into non-current assets category too.

5. 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 over drafts, taxes due but not yet paid, and goods supplied on credit.

6. 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.