Balance Sheet

The accounting system of a business continuously reflects the BAE. This can be expressed in an extended format known as the balance sheet. The balance sheet gives an indication of the equity, liabilities and assets at a given moment in time.

A distinction is made between long and short-term assets and liabilities. From an accounting point of view, short-term is less than or within one year. Stock is purchased with the intention to sell within one year (immediately, if possible), therefore a short-term asset. Creditors need to be paid within 30 days or perhaps 2 to 3 months, therefore it is a short-term liability.

Assets such as vehicles and computers are purchased to last longer than one year; therefore, they are long-term assets. The conditions pertaining to cash loans will dictate whether they are short or long-term. A mortgage bond on land and buildings will be classified as a long-term liability.

Short-term liabilities are known as current liabilities and short-term assets as current assets.

Equity and Liabilities

"Equity and liabilities" refer to funds obtained by the business to purchase assets plus any profits from the activities of the enterprise.  "Employment of capital" show what has been done with funds and profits.

The terminology used for equity will depend on the form of enterprise:

• Company - Share capital
• Close corporation - Members' funds
• Partnership - Capital accounts
• Sole proprietorship - Capital

Undistributed profit also forms part of equity and is shown as "Retained Earnings".