Mgt 101 Introduction to Balance Sheet


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The accounting balance sheet is one of the major financial statements
used by accountants and business owners. (The other major financial
statements are the income statement, statement of cash flows, and
statement of stockholders' equity) 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. Some describe the balance sheet as a "snapshot"
of the company's financial position at a point (a moment or an
instant) in time. For example, the amounts reported on a balance sheet
dated December 31, 2012 reflect that instant when all the
transactionsthrough December 31have been recorded.
Because the balance sheet informs the reader of a company's financial
position as of one moment in time, it allows someone—like a
creditor—to see what a companyownsas well as what itowesto other
parties as of the date indicated in the heading. This is valuable
information to the banker who wants to determine whether or not a
company qualifies for additional credit or loans. Others who would be
interested in the balance sheet include current investors, potential
investors, company management, suppliers, some customers, competitors,
government agencies, and labor unions.
InPart 1we will explain the components of the balance sheet and inPart
2we will present a sample balance sheet. If you are interested in
balance sheet analysis, that is included in the Explanation of
Financial Ratios.
We will begin our explanation of the accounting balance sheet with its
major components, elements, or major categories:
*.Owner's (Stockholders') Equity
Assets are things that the company owns. They are the resources of the
company that have been acquired through transactions, and have future
economic value that can be measured and expressed in dollars. Assets
also include costs paid in advance that have not yet expired, such as
prepaid advertising, prepaid insurance, prepaid legal fees, and
prepaid rent. (For a discussion of prepaid expenses go to Explanation
of Adjusting Entries.)
Examples of asset accounts that are reported on a company's balance
sheet include:
*.Petty Cash
*.Temporary Investments
*.Accounts Receivable
*.Prepaid Insurance
*.Land Improvements
*.Bond Issue Costs
Usually asset accounts will havedebitbalances.
Contra assets are asset accounts withcreditbalances. (A credit balance
in an asset account is contrary—or contra—to an asset account's usual
debit balance.) Examples of contra asset accounts include:
*.Allowance for Doubtful Accounts
*.Accumulated Depreciation-Land Improvements
*.Accumulated Depreciation-Buildings
*.Accumulated Depreciation-Equipment
*.Accumulated Depletion
Classifications of Assets on the Balance Sheet
Accountants usually prepare classified balance sheets. "Classified"
means that the balance sheet accounts are presented in distinct
groupings, categories, or classifications. The asset classifications
and their order of appearance on the balance sheet are:
*.Current Assets
*.Property, Plant, and Equipment
*.Intangible Assets
*.Other Assets
Liabilities are obligations of the company; they are amounts owed to
creditors for a past transaction and they usually have the word
"payable" in their account title. Along with owner's equity,
liabilities can be thought of as asourceof the company's assets. They
can also be thought of as a claimagainsta company's assets. For
example, a company's balance sheet reports assets of $100,000 and
Accounts Payable of $40,000 and owner's equity of $60,000. The source
of the company's assets are creditors/suppliers for $40,000 and the
owners for $60,000. The creditors/suppliers have a claim against the
company's assets and the owner can claim what remains after the
Accounts Payable have been paid.
Liabilities also include amounts received in advance for future
services. Since the amount received (recorded as the asset Cash) has
not yet been earned, the companydefersthe reporting of revenues and
instead reports a liability such as Unearned Revenues or Customer
Deposits. (For a further discussion on deferred revenues/prepayments
see the Explanation of Adjusting Entries.)
Examples of liability accounts reported on a company's balance sheet include:
*.Notes Payable
*.Accounts Payable
*.Salaries Payable
*.Wages Payable
*.Interest Payable
*.Other Accrued Expenses Payable
*.Income Taxes Payable
*.Customer Deposits
*.Warranty Liability
*.Lawsuits Payable
*.Unearned Revenues
*.Bonds Payable
Liability accounts will normally have credit balances.
Contra liabilities are liability accounts with debit balances. (A
debit balance in a liability account is contrary—or contra—to a
liability account's usual credit balance.) Examples of contra
liability accounts include:
*.Discount on Notes Payable
*.Discount on Bonds Payable
Classifications Of Liabilities On The Balance Sheet
Liability and contra liability accounts are usually classified (put
into distinct groupings, categories, or classifications) on the
balance sheet. The liability classifications and their order of
appearance on the balance sheet are:
*.Current Liabilities
*.Long Term Liabilities
To see how various liability accounts are placed within these classifications
A company's commitments (such as signing a contract to obtain future
services or to purchase goods) may belegallybinding, but they are not
considered a liability on the balance sheet until some services or
goods have been received. Commitments (if significant in amount)
should be disclosed in the notes to the balance sheet.
Form vs. Substance
The leasing of a certain asset may—on the surface—appearto be a rental
of the asset, but in substance it may involve a binding agreement to
purchase the asset and to finance it through monthly payments.
Accountants must look past theformand focus on thesubstanceof the


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