The Balance Sheet (Sections 3.1 - 3.3)

Balance Sheet

Records the company’s assets (resources) and how they were funded (liabilities + shareholders’ equity) on a particular date (end of the quarter/year).

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What is the difference between the Income Statement and the Balance Sheet?

The IS reports a company’s revenues, expenses, and profitability over a specific period of the time while the Balance Sheet reports company assets at the end of the quarter or end of the year.

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Assets = ?

Liabilities + Equity

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According to the conservatism principle and historical cost principle of accrual accounting, the Balance Sheet __________.

does not record the fair market value of assets; it records the historical/book value

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Assets

The company’s resources. These resources are:

1. Owned by the company

2. Valued by the company

3. Quantifiable/measurable (have a measurable cost)

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What are some main examples of assets?

1. Cash — money held by the company in its bank accounts

2. Marketable services — debt or equity securities held by the company

3. Accounts Receivable (A/R) — payment owed to the company by customers for products/services already delivered to them

4. Inventories — finished or unfinished goods waiting to be sold, and the direct costs associated with producing them

5. Prepaid expenses — when a company prepays for services (e.g. utilities, insurance, rents), the rights to future services become assets

6. Property, Plant & Equipment (PP&E) — land, buildings, and machinery used in the manufacturing of company goods/services

7. Intangible Assets & Goodwill — patents, trademarks, and goodwill acquired by the company

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Liabilities

What a company owes to others. In order for something to count as a liability, it must:

• Be measurable

• Have a probable occurrence

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Equity

Sources of funds obtained through:

• Equity investment

• Retained earnings (what the company has earned through operations since its inception)

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What are some common types of liabilities?

1. Accounts Payable — company’s obligations to suppliers for services and products already purchased, but have not been paid

2. Accrued Expenses — expenses like employee compensation that the company has incurred, but have not yet paid

3. Short-term Debt — debt due within 12 months

4. Long-term Debt — debt whose maturity exceeds 12 months

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What are some common types of equity?

1. Preferred Stock — “special” stock that takes priority over common stock

2. Common Stock — represents capital received by a company when it issues shares

3. Treasury Stock — stock that’s been issued and then reacquired by the company

4. Retained Earnings — total earnings/losses since its inception less all dividends

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Any change in assets or liabilities or shareholders’ equity is accompanied by __________ that keeps the balance sheet __________. For example, when companies use cash to buy inventories, fixed assets, and make investments, cash is _________ and other assets are _________.

an offsetting change ; in balance ; decreased ; increased

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Every single transaction can be viewed as having two sides: the __________ and the _________. This is why Assets = Liabilities + Equity.

source of funds (credit) ; use of funds (debit)

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Double Entry Accounting

Records the two sides of a transaction (the funding source + the usage of the funds).

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T-Account

Used to depict double-entry accounting.

• Left: Debit

  • Increase in assets

  • Decrease in equity + liabilities

• Right: Credit

  • Increase in equity + liabilities

  • Decrease in assets

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Why is double-entry accounting important?

It emphasizes the relationship between a company’s assets (resources) and their liabilities/equity (funding). It also helps to define the relationship between the I/S, the B/S, and the cash flow statement as credits and debits.

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