Components of a Balance Sheet
From “An Introduction to the Balance Sheet¨ in Accounting and Finance for Managers
[…], a balance sheet is concerned with the financial position of a business at a particular date.
Assets and Liabilities
The financial position is (Kind 1999, 14):
From “An Introduction to the Balance Sheet¨ in Accounting and Finance for Managers
[…] a summary of what the business owns[sic], called ‘assets´, […] and what the business owes[sic], called ‘liabilities´, […]
An asset is what one owns, while a liability is what one owes.
Assets v. liabilities as reciprocal/mutual obligations
Another way of thinking about the difference is to think of assets as transactional or contractual obligations to oneself, especially from another, and to think of liabilities as transactional or contractual obligations to another, especially from oneself.
Assets can be further broken down into (Kind 1999, 16):
- Fixed assets are assets intended to remain long-term–conventionally “for more than a year¨
- Current assets are assets that can easily be expended or worn out in the short-term–conventionally, they “are either in the form of cash,¨ i.e. some liquid instrument, or “can be converted easily into cash within 12 months of the balance sheet date¨
Assets are fixed assets and current assets
Mathematically, then, as we let mean assets, , where qualifies the asset as fixed and qualifies the asset as current.
Since the balance sheet may be published “at a particular date such as the end of the month or the end of the […) year,¨ assets are typically listed at what is called their “historic cost,¨ i.e. at the cost of the asset at the time of acquisition and no later or before (Kind 1999, 14).
A symmetrical analysis can be made of liabilities as current liabilities and fixed liabilities, where current liabilities (Kind 1999, 17):
From “An Introduction to the Balance Sheet¨ in Accounting and Finance for Managers
[…] are liabilities or commitments which have to be paid off within 12 months of the balance sheet date.
Shareholder Equity as a Company’s Fixed Liability
Shareholder equity, a.k.a. risk capital, could be seen then as an example of a fixed liability, at least if the balance sheet statement is being written “from the company’s point of view¨ rather than from the shareholders’ (Ibid). Shareholder equity “is the most permanent part of the financing of a business¨ and is considered risk capital because it “cannot be paid back to shareholders […] until all other external commitments […] have been discharged¨ (Ibid).
Shareholder equity is comprised of past operating profit (refer to Operating Profit and Operating Expenses) and issued share capital, the latter being (Kind 1999, 15 & 17):
From “An Introduction to the Balance Sheet¨ in Accounting and Finance for Managers
[…] the amount of capital contributed in cash by a[sic] shareholder(s) and received by the business.
While share capital is more broadly “the permanent capital contributed by the owner or owners of a business¨ (Kind 1999, 15).
Shareholder equity is operating profit and issued share capital
Mathematically, so long as we let mean (shareholder) equity, mean (past) operating profit, and mean share capital, then .
Working Capital and Capital Employed
There are other things that can be evaluated using assets and liabilities. One of them is working capital or net current assets, which is thought to represent “the short-term assets invested in the business to enable it to trade¨ or engage in exchange (Kind 1999, 18). This is calculated by taking “the difference between current assets […] and current liabilities […]¨ (Ibid).
Net current assets is current assets minus current liabilities
Mathematically this would look like the following: . In this, stands for working capital or net current assets.
Meanwhile, “total assets less current liabilities is referred to as capital employed[sic]¨ (Ibid).
Capital employed is assets minus current liabilities
This can be formulated as: . In this, stands for capital employed.
What is in Balance
The reporting on a balance sheet applies the financial concept of the dual aspect of exchange or transaction, which (Kind 1999, 14):
From “An Introduction to the Balance Sheet¨ in Accounting and Finance for Managers
[…], stipulates that every accounting transaction has two equal and opposite elements.
Commodity vectors and inverse values
This may be derived from the fact that an exchange or transaction neither creates nor destroys value, but simply moves one form of it around for another. As the vectors of commodities in social space are opposite to each other, their values can be given inverse numerical signatures for a given agent.
Commodity vectors, obligation, and value
How does this relate to mutual or reciprocal obligation, as used to explain the difference between assets and liabilities?
It is assumed that “these two elements must balance¨ (hence “balance sheet¨) (Ibid):
From “An Introduction to the Balance Sheet¨ in Accounting and Finance for Managers
[…], total assets must always equal total liabilities.
Important
Mathematically, this could be expressed simply as , so long as we assume that and are both respective totals under the same scope. Alternatively, this could be more accurately written in capital-sigma notation, though I am not advanced enough to do so yet.
dual_aspect finance balance_sheet financial_position vector commodity social_space sociology social_science theories_of_value theory_of_value economics mathematics math signature capital-sigma_notation obligation historic_cost risk_capital shareholder shareholder_equity operating_profit share_capital issued_share_capital commitment working_capital capital_employed net_current_assets current_assets mathematics mathematical_operator mathematical_operators binary_operators binary_operator subtraction addition subtraction_operator subtraction_operators addition_operator addition_operators equality sum difference math
bibliography
- “An Introduction to the Balance Sheet.” In Accounting and Finance for Managers. The Fast Track MBA Series. Dover, NH: PriceWaterhouseCoopers, 1999.