Agriculture Reference
In-Depth Information
Long-term liabilities (hh)
Outsiders' claims against the business that do not come due within one year are called
long-
term liabilities
or noncurrent liabilities. Included in this category are bonded indebtedness,
mortgages, and long-term loans from individuals, banks, or others. Any part of the principal
for a long-term debt that falls due within one year from the date of the balance sheet is
recorded as part of the current liabilities of the business. BF&G has both a mortgage (ii) and
other long-term debt (jj).
Owner's equity (mm)
The
owner's equity
or net worth section (mm) details the claims of the owners against the
business's assets. It is a summation of the accounts that report owner equity (i.e., earnings
retained in the business, contributions, paid-in capital, etc.). The balance sheet balances
because of the inclusion of all applicable accounts and their respective amounts for all three
sections of the balance sheet, including the owner equity section. Viewed a different way,
the balance sheet formula becomes:
Assets
−
Liabilities
=
Owner s Equity
'
In an incorporated business, the owner's original or contributed investment to the business
is listed as a separate entry called common stock (oo). This does not necessarily represent the
current market value of the common stock, but rather its original value. (Market value of
stock is a totally separate issue, determined solely by buyers' and sellers' perceptions of the
value of the business.)
The category of retained earnings (pp) represents the net gain on the owners' original
investment. If no profi ts were ever drawn from the business, the retained earnings fi gure
would refl ect the total amount of profi t that the business has made since its inception.
Of course, most owners expect to remove profi ts regularly from the business as a return on
their investment. Thus, retained earnings represent whatever net profi ts the owners have
chosen to leave in the business. BF&G owners have left $1,780,000 of earned profi ts in the
business to combine with their original $1,885,000 investment. For most companies, retained
earnings are an important source of capital for growth.
When the business is a sole proprietorship or partnership (see
Chapter 4
), the owner's
equity is often reported as one entry and the owners' initial investment is not separated from
the accumulated retained earnings of the business. However, in the case of the incorporated
business, there are entries for stockholders' claims and also for earnings that have been
accumulated and retained in the business. Of course, if the business has been consistently
operating at a loss, the owners' claims may be less than the initial investment; and, in the
case of a corporation, the balancing account could be an operating defi cit rather than retained
earnings.
The complete combination of all the entries outlined above creates a full balance
sheet. This fi nancial statement provides a great deal of information. It illustrates what
the business owns and what claims exist against these resources. Managers need this
information to help them decide what actions they should take in running their business.
Outsiders seek this information to determine, among other things, the creditworthiness
of the fi rm. Owners utilize this information to judge the performance of the management
team.
