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Sources of the firm in a balance sheet

Sources of the firm in a balance sheet

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The balance sheet consists of assets and liabilities of any firm. The assets are called as the uses of the firm and the liabilities are called as the sources of the firm.
The balance sheet consists of assets and liabilities of any firm. The assets are called as the uses of the firm and the liabilities are called as the sources of the firm.

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Published by: ClassOf1.com on May 02, 2013
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05/15/2014

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 Accounting
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Sub: Accounting Topic:
 
Financial Accounting
*
Sources of the firm in a balance sheet
 
The balance sheet consists of assets and liabilities of any firm. The assets are called as the uses of thefirm and the liabilities are called as the sources of the firm.
Sources of the firm: (Debts or liabilities)
: The debts or liabilities are the claims of the outsidersagainst the assets of the firm. The liabilities refer to the amount payable by the firm to theclaimholders; i.e. the amount owed by the firm to other parties. For an obligation to be recognized asa liability, it must meet three requirements.i) Be expected to lead to a future cash outflow;ii) The firm cannot avoid the obligation andiii) The transaction giving rise to the obligation must have already happenedThe liabilities may be classified on the basis of payment commitments into long term liabilities andcurrent liabilities.The long term liabilities include the capital, reserves and the debts incurred by the firm, which arenot payable during a period of next one year. So the long term liabilities are those obligations of thefirm which are not to be discharged during the next one year. The long term liabilities may includethe bonds and debenture, mortgaged loans, loans from financial institutions etc. The long termliabilities thus, represent the long term borrowings of the firm.The current liabilities, on the other hand, are those liabilities which the firm expects to pay within aperiod of one year. The current liabilities relate to the current assets of the firm in the sense that thecurrent liabilities are paid out of the realizations of current assets. The current liabilities (and current
 
 
Sub: Accounting Topic:
 
Financial Accounting
*
assets also) relate to the operating cycle of the firm. The current liabilities are expected to bedischarged within an operating cycle of the firm. The current liabilities may include payable (creditorsand bills), outstanding expenses, bank overdraft, provision for tax etc.
Shareholders equity
: The shareholders' equity represents the ownership interest in the firm andreflect the obligations of the firm towards its owners. The shareholders' equity consists of the sharecapital and the retained earnings. The share capital is the direct contribution of the shareholders tothe firm. The retained earnings on the other hand reflect the accumulated effect of the firms earning(which have not been distributed). So the retained earnings are the amount earned, retained andreinvested on behalf of shareholders in the item itself. The profits retained in former distributedamong the shareholders, represent the deemed investment by the shareholders of the firm. Theshareholders' equity is also known as the net worth.Taken together, the liabilities and the shareholders' equity must be equal to the total assets of thefirm. The balance sheet supplies a lot of information for the critical analysis of the financial positionof the firm.

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