Balance sheet - a static picture

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categorie: Engleza

nota: 10.00

nivel: Facultate

The balance sheet is the fundamental accounting statement in the sense that every accounting transaction can be analysed in terms of its dual impact on the balance sheet. We can interpret balance sheet in two ways, both being correct. The items listed on the asset side are the economic resources of the entity as of the date of the balance sheet. The amounts stated for each asset are recorded in ac[...]
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The balance sheet is the fundamental accounting statement in the sense that every accounting transaction can be analysed in terms of its dual impact on the balance sheet. We can interpret balance sheet in two ways, both being correct. The items listed on the asset side are the economic resources of the entity as of the date of the balance sheet. The amounts stated for each asset are recorded in accordance with the basic concepts of accounting. Liabilities and owners' equity are claims against the entity as of the balance sheet date. Liabilities are the claims of outside parties (amounts that the entity owes to banks, vendors, employees, other creditors). Owners' equity shows the claims of the owners.

However, an entity's owners do not have a claim in the same sense that the creditors do. In the X Corporation illustration, it can be said that governmental taxing authorities had a claim of $ 1672000 as of December 31, 1993 -that the corporation owed them $ 1672000, neither more, nor less. The shareholders' equity might be worth considerably more or less than $ 24116976. The shareholders' equity of a healthy, growing company is usually worth considerably more than its "book value" -the amount shown on the balance sheet. On the other hand, if a company is not salable as a going concern and is liquidated with the assets being sold piecemeal, the owners' proceeds are often only a small fraction of the amount stated in the balance sheet.

Often, when a bankrupt company's assets are liquidated, the proceeds are inadequate to satisfy 100% of the creditors' claims, in which case he owners receive nothing. The resources and claims view of the balance sheet has some shortcomings. Therefore, the second way of interpreting the balance sheet has considerable appeal. In this alternative view, the left-hand side of the balance sheet is said to show the forms in which the entity has used, or invested, the funds provided to it as of the balance sheet date.

These investments have been made in order to help the entity achieve its objectives, which in a business organisation include earning a satisfactory profit. The right-hand side shows the sources of the funds that are invested in the assets- it shows how the assets were financed. The several liability items describe how much of that financing was obtained from trade creditors(accounts payable), from lenders(long term debt), and from other creditors. The owners' equity section shows the financing supplied by the owners.
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