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Statement of financial position -the balance sheet

The balance sheet contains capital items, the assets that hold value for the future, and the infrastructure or equipment available to be used to generate profits over the years ahead. The word 'infrastructure' is used in a wide sense to encompass, for example, patents and licenses, as today many businesses' capital assets are knowledge based rather than physical.

The balance sheet also contains short-term assets, for example inventory to be sold in the next few months, receivables which will hopefully be paid for soon. Then there are 'capital' liabilities in the form of company stock or share capital, that is, money invested by stock- or shareholders. The equity is invested in perpetuity unless the entity is wound up. This equity owes its owners value backed by the net assets employed; the stock or share price will often be much higher as the right of ownership gives the right to future cash flows and profits through the right to receive future dividends.

A balance sheet is a statement compiled at a specific point in time, normally at year-, period- or month-ends. It has two parts, or sides, which total to exactly equal amounts - it balances! There are many uses of a balance sheet. It could be a control statement - the traditional and historical act of listing of assets to check that they equal liabilities, or it could be a statement of historical or updated worth of a business. There are many possible formats for a balance sheet, and for published financial statements the FASB/IASB have recommended layouts. However, worldwide there will be local company law, conventions and practices, thus we are faced with having to cope with many variants of format. Examples of possible formats are given later in the chapter and again in Chapter 6 on published financial statements.

 
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