A firm is an inclusive name for all business structures, including companies, partnerships, proprietorships, banks, etc. A firm prepares a report called financial statements once each year.
This report has two main elements:
A balance sheet
An income statement
Each of these elements has two parts and a bottom line, as presented in the following table. The bottom line is the difference between part A and part B.
Components of the Balance Sheet and Income Statement
(Total Assets) – (Total Liabilities)
(Total Revenues) – (Total Expenses)
The Balance Sheet
The balance sheet presents a picture of the firm’s assets and the firm’s liabilities, on a given date, usually the last day of the year. The balance sheet is presented in two columns, as shown in Table 7.5.
The left column lists all the assets of the firm, and the right column lists all its liabilities. The right column also presents the difference between assets and liabilities using the following terms:
- If the difference is positive (assets are greater than liabilities) – “shareholders’ equity”
- If the difference is negative (liabilities are greater than assets) – “deficit”.
Adding the difference to the right column causes the total of the left column to be equal to the total of the right column. The term “balance sheet” is derived from this fact (meaning that a balance exists between the two columns).
The Balance Sheet of the Furnishing Company on 31.12.01(figures are in dollars)
Bank loans 250
Customer credit 100
Total liabilities 350
Equity capital 200
Summary Balance Sheet
When the asset and liability items are not listed, or are only partially listed, the report is called a “Summary Balance Sheet”, as shown in Table 7.6.
Summary Balance Sheet of the Furnishing Company on December 31, 2008 (figures are in dollars)
Equity Capital 200
Although the right column was called “Liabilities”, its full title should be “Liabilities + Equity”, as follows:
Liabilities + Equity