3. Def: Balance Sheet
The accounting balance
sheet is one of the major
financial statements used by
accountants and business
owners. The balance sheet is
also referred to as the
statement of financial
position. The balance sheet
presents a company's
financial position at the end
of a specified date.
4. Assets = Liabilities + Shareholders' Equity
• Assets are economic resources that are expected to produce economic benefits for
their owner
• Liabilities are obligations the company has to outside parties. Liabilities represent
others' rights to the company's money or services. Examples include bank loans, debts to
suppliers and debts to employees.
• Shareholders' equity is the value of a business to its owners after all of its
obligations have been met. This net worth belongs to the owners. Shareholders' equity
generally reflects the amount of capital the owners have invested, plus any profits
generated that were subsequently reinvested in the company.
5. Assets:
Current Assets - These are assets that may be converted into cash, sold or consumed within a year
or less. These usually include:
• Cash - Legal tender or coins that can be used in exchange goods, debt, or services. Sometimes also including
the value of assets that can be converted into cash immediately, as reported by a company.
• Marketable securities (short-term investments) - These can be both equity and/or debt securities for
which a ready market exists. Furthermore, management expects to sell these investments within one year's
time. These short-term investments are reported at their market value.
• Accounts receivable - Money owed by customers (individuals or corporations) to another entity in exchange
for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the
form of operating lines of credit and are usually due within a relatively short time period, ranging from a few
days to a year.
• Notes receivable - Notes Receivable represents claims for which formal instruments of credit are issued as
evidence of debt, such as a promissory note. The credit instrument normally requires the debtor to pay interest
and extends for time periods of 30 days or longer.
• Inventory - This represents raw materials and items that are available for sale or are in the process of being
made ready for sale. These items can be valued individually by several different means, including at cost or
current market value.
• Prepaid expenses - These are payments that have been made for services that the company expects to
receive in the near future. Typical prepaid expenses include rent, insurance premiums and taxes. These
expenses are valued at their original cost.
6. Long-Term assets - These are assets that may not be converted into cash, sold or consumed
within a year or less. These are:
• Investments - These are investments that management does not expect to sell within the year. These
investments can include bonds, common stock, long-term notes, investments in tangible fixed assets
not currently used in operations (such as land held for speculation) and investments set aside in
special funds, such as sinking funds, pension funds and plan-expansion funds. These long-term
investments are reported at their historical cost or market value on the balance sheet.
• Fixed assets - These are durable physical properties used in operations that have a useful life longer
than one year. This includes:
• Machinery and equipment - This category represents the total machinery, equipment and furniture used in the
company's operations. These assets are reported at their historical cost less accumulated depreciation.
• Buildings or Plants - These are buildings that the company uses for its operations. These assets are depreciated and
are reported at historical cost less accumulated depreciation.
• Land - The land owned by the company on which the company's buildings or plants are sitting on. Land is valued at
historical cost and is not depreciable under U.S. GAAP.
• Other assets - This is a special classification for unusual items that cannot be included in one of the
other asset categories. Examples include deferred charges (long-term prepaid expenses), non-current
receivables and advances to subsidiaries.
• Intangible assets - These are assets that lack physical substance but provide economic rights and
advantages: patents, franchises, copyrights, goodwill, trademarks and organization costs.
7. Liabilities:
Current liabilities - These are debts that are due to be paid within one year or the operating
cycle, whichever is longer.
Usually included in this section are:
• Accounts payable - This amount is owed to suppliers for products and services that are delivered but not
paid for.
• Wages payable (salaries), rent, tax and utilities - This amount is payable to employees, landlords,
government and others.
• Accrued liabilities (accrued expenses) - These liabilities arise because an expense occurs in a period prior
to the related cash payment. This accounting term is usually used as an all-encompassing term that includes
customer prepayments, dividends payables and wages payables, among others.
• Notes payable (short-term loans) - This is an amount that the company owes to a creditor, and it usually
carries an interest expense.
• Unearned revenues (customer prepayments) - These are payments received by customers for products
and services the company has not delivered or for which the company has not yet started to incur any cost
for delivery.
• Dividends payable - This occurs as a company declares a dividend but has not yet paid it out to its owners.
• Current portion of long-term debt - The currently maturing portion of the long-term debt is classified as a
current liability. Theoretically, any related premium or discount should also be reclassified as a current
liability.
8. Long-term Liabilities - These are obligations that are reasonably expected to be
liquidated at some date beyond one year or one operating cycle. Usually included are:
• Notes payables - This is an amount the company owes to a creditor, which usually
carries an interest expense.
• Bonds payable- Generally a long term liability account containing the face amount,
par amount, or maturity amount of the bonds issued by a company that are
outstanding as of the balance sheet date.
• Long-Term Debt- Loans and financial obligations lasting over one year. Long-
term debt for a company would include any financing or leasing obligations that are
to come due in a greater than 12-month period.
9. Shareholders' equity:
•Common Stock: A security that represents ownership in a
corporation. Holders of common stock exercise control by electing a board
of directors and voting on corporate policy. Common stockholders are on
the bottom of the priority ladder for ownership structure.
• Retained Earnings: A stockholders' equity account that generally
reports the net income of a corporation from its inception until the
balance sheet date less the dividends declared from its inception to the
date of the balance sheet.
10. Some Basic Steps To Create A Balance Sheet :
Setting Up Your Balance Sheet.
Determine the date of the balance sheet.
Prepare the header of the balance sheet.
Preparing the Assets Section.
List all current assets.
List all non-current assets, also known as long-term assets.
Add up the current and non-current assets totals and label this amount “Total Assets.”
Preparing the Liabilities Section.
Determine current liabilities.
Calculate all long-term liabilities, also known as fixed liabilities.
Add the current liabilities and long-term liabilities and label this line “Total Liabilities.”
Calculating Owner's Equity and Totals.
Prepare a Statement of Retained Earnings.
Calculate the owner's equity and list under the title "Total Owner’s Equity.“
Add the “Total Liabilities” and “Total Owner’s Equity” figures.
11. Balance sheet format
Assets: Liabilities:
Current: Current:
Cash Accounts Payable
Accounts Receivable Accrued Expenses (Liabilities)
Inventory Unearned Revenues
Prepaid Expenses “_______” Payables
Short-term Investments Income Taxes Payable
Short-term Notes Receivable Short-term Notes Payable
Supplies Current Portion of Long-term Debt
Total Current Assets Total Current Liabilities
Long-term Investments Bonds Payable
Long-term Notes Receivable Long-term Debt
Long term Notes Payable
Total Liabilities
Property/Plant/Equipment (P/P/E):
Land
Building
Equipment
Less Accumulated Depreciation
Net P/P/E Stockholder’s Equity:
Intangible Assets Common Stock
Goodwill Additional Paid in Capital
Patents, net Retained Earnings
Trademarks, net less Treasury Stock
Copyrights, net
Total Intangible Assets Total Stockholder’s Equity
Other Assets
Total Assets must = Total Liabilities & Stockholder’s equity
12.
13. Check your work. The balance sheet
has been correctly prepared if “Total
Assets” and “Total Liabilities and
Owner’s Equity” are equal. If this is the
case, then your balance sheet is now
complete.