RESULTADOS E INTERPRETACIÓN

The balance sheet has two main components namely:

a. Assets b. Liabilities 3.2.1 Assets

When we are talking of assets generally, we are talking about the valuable possessions owned by the firm, valued in monetary terms. They will include land and buildings, stock of goods, raw materials, cash, vehicles and other valuables.

But generally, we can classify assets under the following headings:

i. Current assets ii. Investments

iii. Non-Current Assets (Fixed Assets) Let us now discuss each of them:

Current Assets

The current assets of a firm or business are those assets which are held in the form of cash or expected to be converted into cash in a period or within the accounting period of the firm. In actual practice, the accounting period is usually of one-year duration.

The current assets of the firm will include the following:

i. Cash

ii. Accounts Receivables (debtors).

iii. Prepaid expenses (expenses paid in advance) iv. Marketable securities.

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v. Inventory (Stock)

Let us start with cash which is one of the most liquid current assets. Cash will mean cash on hand or cash in the bank.

Another current asset which is important is accounts receivables (debtors). These are amounts due from debtors to whom goods have been sold or services rendered. Some of the accounts receivables may be realised by the firm. If they are not realized they turn into what is called bad debts and may be written off later.

Prepaid expenses are also current assets. They are expenses of future periods that are paid in advance. An example of prepaid expenses is rent which may be payable in advance by a firm. For example, in January 2018, a firm may pay rent for its office for January 2018 to December, 2018. If in April, 2018, the financial year of the firm ends, it will regard the portion of rent paid from May 2018 to December, 2018 as a prepaid expense which invariably is a current asset.

Stock (inventory) is another current asset and includes raw material, work in process and finished goods. The raw materials and work in process are required for maintenance of the production function of the firm.

Finished goods usually will be already packed and kept ready for purchase by customers of the business. Marketable securities are the firm‘s short-term investment in shares, bonds and other securities. The securities are usually marketable and can be converted into cash in a very short time.

Investments

Investments represent the firm‘s investments in shares, debentures and bonds of either firms or the government. By their nature, the investments are long term. It is important to note that the investments yield income to the firm.

Non-Current Assets

Non-current assets are long-term assets held for periods longer than one year. They are usually held for use in the firm‘s business. Fixed assets include land, buildings, plants, machinery and equipment, vehicles, etc.

We have briefly seen what the assets are. We shall now move over and discuss liabilities.

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3.2.2 Liabilities

When we talk of liabilities, we mean the debts that are payable by the firm or business to creditors. They may represent various obligations due to various third parties arising from various business transactions. In simple term, the wants the firm is owing outsiders.

Examples of liabilities include creditors, accounts payable (Creditors), taxes payable, bonds, debentures, etc. But generally, liabilities are divided into two broad groups namely:

• Current liabilities and

• Long-term liabilities

We shall discuss each of the groups

Current Liabilities

Current Liabilities are those debts that are payable in a short period usually within a year. One of the major current liabilities is the bank overdraft. Most banks grant their customers overdraft which are repayable within a period of one year. The other type of current liability includes provisions for taxes and dividends. These are liabilities that will mature within one year.

Another type of liability is accounts payables (Creditors). The firm may make expenses to public power supply organisation or have rents to be paid (Accruals that is payment in arrears).

Long Term Liabilities

Long-term liabilities are the obligations which are payable in a period of time greater than a year. One of the long-term liabilities of a firm is term loan. The firm may borrow money from a bank that will be repayable over a period preceding one year.

Such a borrowing or loan is regarded as long-term liability. Also, when a firm needs to raise a large sum of money, it can issue debentures. A debenture is an obligation on the part of a firm to pay interest and principal under the terms of the debenture.

However, one of the most stable types of long-term liability is owners‘ equity.

Owner‘s equity represents the owners‘ interest in the firm. The owners‘ interest in the firm consist of

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• Paid up share capital and

• Retained earnings (undistributed profits).

SELF ASSESSMENT EXERCISE Discuss the components of a balance sheet.