Accounting Course Assignment ACCT205 - Essay Example

Users of financial information can look at a balance sheet at the end of each accounting period and know if the business has more or less value if the debts are higher or lower, and if the working capital is higher or lower. This can be easy if the balance sheet is properly prepared. By analyzing the balance sheet, users such as investors, creditors, taxation departments and shareholders can assess the ability of the organization to meet short-term obligations and solvency, as well as the ability of the organization to pay all current and long-term debts as they fall due. L. Jensen, (1997) indicates that the balance sheet also shows the relative proportions of debt and equity financing, the composition of assets and liabilities, and the amount of earnings that the company has had to retain as retained earnings.

This information will be used by external parties such as investors, the government, creditors, debtors and others to help assess the company’s financial status in a specific financial year, which is required by both lending institutions and investors before they will allot any money toward business whether for lending or for investing.  A corporation is a business entity that is wholly owned by its shareholders. It often raises equity capital by selling shares of stock to investors. Equity is the main source of funds of a corporation.

Equity capital is an ownership interest in the corporation and each share of stock represents a fractional interest in the issuing firm. Shareholders in a corporation make vital decisions such as electing directors, investment decisions and other major decisions. The management acts as stewards of the shareholders’ funds. It is of importance to note that equity capital is not a liability to be repaid at a future date but is usually added to the liabilities in the balance sheet. Business accounting guides.com