Balance Sheet Basics & Adjusting Entries – Quick Reference Notes
Balance Sheet Basics
Core structure: assets, liabilities, and equity ().
Equity is the owner
Current vs Noncurrent (Long‑term)
Current: used/converted to cash or due within one year/operating cycle.
Noncurrent: not used/due within one year (e.g., plant assets, long-term investments, intangible assets).
Asset Categories and Key Details
Current assets: cash, accounts receivable, supplies, prepaid expenses, short-term investments.
Plant assets: equipment, buildings, machinery; includes accumulated depreciation (a contra asset).
Long-term investments and intangible assets (e.g., patents) are shown separately.
Liability and Equity Breakdown
Current liabilities: accounts payable, wages payable, taxes payable, unearned revenue.
Long-term liabilities: mortgages payable, long-term notes payable.
Equity: common stock, retained earnings.
Balance Sheet Template – Layout & Subtotals
Organized with subtotals for current assets/liabilities, then total assets/liabilities. Equity follows liabilities.
Accumulated depreciation reduces the related asset.
Adjusting Entries – Key Types to Know
Purpose: To ensure revenues and expenses are recognized in the correct accounting period.
Types:
Accrued revenues: earned but not collected (Dr Accounts receivable, Cr Revenue).
Accrued expenses: incurred but not paid (Dr Expense, Cr Payables).
Prepaid expenses: allocate used portion (Dr Expense, Cr Prepaid asset).
Unearned revenue: recognize as earned (Dr Unearned revenue, Cr Revenue).
Depreciation: allocate asset cost (Dr Depreciation expense, Cr Accumulated depreciation).
Interest: record interest owed or earned (Dr/Cr Interest receivable/payable, Cr/Dr Interest revenue/expense).
Salaries/Wages: accrue unpaid compensation (Dr Salaries expense, Cr Salaries payable).
Adjusted Trial Balance – Purpose and Process
Prepared after all adjusting entries are posted.
Purpose: To confirm debits equal credits and provide balances for financial statement preparation.
Cash is generally not affected by adjusting entries.
From Adjusted Trial Balance to Financial Statements
Income Statement: Revenues - Expenses = Net Income.
Balance Sheet: Uses adjusted balances for assets, liabilities, and equity.
Quick Problem-Solving Approach
Classify items as current/noncurrent, asset/liability/equity.
Distinguish cash movements from non-cash adjustments.
Match adjustments correctly to contra accounts (e.g., depreciation to accumulated depreciation).
Trace adjustments through T-accounts to financial statements.
Quick Reference Formulas
Ending supplies usage:
Depreciation entry: