Know The Components in The Capital Side Of A Balance Sheet(Part2of3)

WHAT IS A BALANCE SHEET?

A Balance Sheet is a snapshot of the financial position of an entity.

This snapshot is at a point of time.

Say, as at 7 May 2006, you look at Company A’s balance sheet, it reflects the financial position as at that day. After that day, the financial position company A can change to a better or worse situation.

Also, remember that in the Balance Sheet, we have the three (3) key components:

Assets= Liabilities + OWNERS’ EQUITY

( Refer to my illustration for the Dual Aspect Concept)

DEFINE OWNERS’ EQUITY:

Looking at the equation:

Assets= Liabilities + Owners’ Equity

However, if we change it to :

Owners’ Equity= Assets-Liabilities

(Assets=what the entity owns & Liabilities=what the entity owes)

In this case, we can see that the owners’ equity is the residual after total assets minus the liabilities relating to the acquiring the assets. Owners’ equity is the paid-up capital plus free reserves and retained earnings or undistributed profits

Here, we can understand that Owners’ equity can also be called the NET WORTH of the business namely whatever belonging to the owners of the business.

WHAT ARE THE MAJOR COMPONENTS OF THE OWNERS’ EQUITY?

Comprises:

1. Paid Up Capital

2. Capital Reserves or Non-Distributable Reserves

3. General Reserves or Distributable Reserves