27 May 2013

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Introduction to Balance Sheet Print E-mail
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Written by Sunil Tinani   
Page 3 of 3

Equity

The equity of a company appears on the liabilities side of a Balance Sheet, and here are its components:

  1. Common stock: This comprises the equity and the preference class of shares issued by the company. These are issued at the inception and maybe even at later dates when the company needs funds for expansion or diversification.

  2. Reserves: These are retained profits accumulated over the years, after dividend payments. Reserves also comprise share premiums, which represent premium charged on the issue of equity shares – a company might issue further equity shares when it reaches a certain level and wants to expand. It naturally follows that when the company reaches a good stage of growth, it needs to price its shares at a premium. Reserves created legally (say, Debenture Redemption Reserve) are also included in this heading.

 

The difference between the assets and the liabilities represents the net worth of a company. Every country has a different set of guidelines that should be followed while drawing up a Balance Sheet. By and large, these guidelines conform to the set of guidelines issued by the International Accounting Standards Committee. If you have planned to invest in the equity of a company, it is important to decipher its profitability and Balance Sheet, and only then step into the waters.

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