Balance sheet

(1) The balance sheet shows the financial status of a company at a particular point in time. It has two counterbalancing sections. The left side lists the resources of the firm or everything the firm owns and controls. The right side lists the claims against the resources. The resources and claims form the balance sheet equation:

(2) Companies usually produce balance sheets when needed by managers and at the end of each quarter for reporting to the public.

►Question/Answer session:

Explain how the balance sheet equation works and define its both sections.

►Below is an example of the balance sheet with the explanation of some of its accounts:

Balance sheet	December 17, 20_ _
Assets
Current assets:
	Cash and cash equivalents
	Accounts receivable				Xxx
	Inventories				Xxx
	Prepaid rent				Xxx
		Total current assets		Xxx
Noncurrent assets:
	Property, plant and equipment			Xxx
	Accumulated depreciation			Xxx
	Goodwill					Xxx
	Trademarks and other intangibles		Xxx
		Total noncurrent assets		Xxx
Total assets					2,729,744
Liabilities and shareholders' equity
Current liabilities:
	Accounts payable				Xxx
	Accrued expenses payable			Xxx
	Income tax payable				Xxx
		Total current liabilities		Xxx
Noncurrent liabilities:
	Long-term debt				Xxx
	Deferred tax liability				Xxx
	Other noncurrent liabilities			Xxx
		Total noncurrent liabilities		Xxx
Shareholders' equity:
	Paid-in capital	Xxx
	Retained earnings				Xxx
		Total shareholders' equity		Xxx
Total liabilities and shareholders’ equity		2,729,744

1. Current assets are cash and other assets that a company expects to convert to cash or sell or consume within the coming year or within the normal operating cycle if no longer than 1 year.

2. Noncurrent assets are assets that a company expects to convert to cash or sell or consume within the period, which is more than 1 year.

3. Current liabilities are liabilities that fall due within the coming year or within the normal operating cycle if longer than 1 year.

4. Noncurrent liabilities are liabilities that fall due within the period, which is more than 1 year.

5. Cash equivalents are highly liquid short-term investments that a company can easily and quickly convert into cash, such as money market funds and Treasury bills.

6. Accounts receivable (trade receivables, receivables) are an amount owed to a company by customers as a result of delivering goods or services and extending credit in the ordinary course of business.

7. Accounts payable are a liability that results from a purchase of goods or services on open account.

8. Inventories are goods held by a company for the purpose of sale to customers.

9. Depreciation is the systematic allocation of the acquisition cost of long-lived[1] or fixed assets to the expense accounts of particular periods that benefit from the use of the assets.

10. Goodwill is the excess of the cost of an acquired company over the sum of the fair market value of its identifiable individual assets less the liabilities.

11. Trademark is a distinctive identification of a manufactured product or of a service taking the form of a name, a sign, a slogan, a logo, or an emblem.

12. Tangible assets (fixed assets, plant assets) are physical items that can be seen and touched, such as land, natural resources, buildings, and equipment.

13. Intangible assets are contractual or legal rights or economic benefits, such as franchises, patents, trademarks, copyrights, and goodwill, that are not physical in nature.

14. Shareholders’ equity (stockholders’ equity, owners’ equity (in case of partnership)) is the total assets of a company minus its liabilities.

15. Paid-in capital is the total capital investment in a corporation by its owners both at and subsequent to the inception of business.

16. Retained earnings (retained income) are total cumulative owners’ equity generated by income or profits.

(3) To illustrate the balance sheet, let’s suppose that Eugene opens his own book store, Book Corner, on January 2, 200... He invests from his personal savings $30,000. Then Eugene borrows $50,000 from a local bank. Now he has $80,000 in cash. The opening balance sheet of this new business is as follows:

Book Corner
Balance sheet
January 2, 20_ _
Assets		Liabilities and Qwners' Equity
Cash	$80,000		Liabilities (note payable)	$50,000
			Eugene, capital	$30,000
Total assets	$80,000		Total liabilities and owners' equity	$80,000

(4) The balance sheet lists the company’s assets on the left. They are balanced on the right by an equal amount of liability and owners’ equity. Note that we always keep the left and right sides in balance.

(5) When someone starts a business, the owners’ equity is equal to the total amount invested by the owner or owners. As illustrated by ‘Eugene, capital’ in the Book Corner example, accountants often use the term ‘capital’ instead of ‘owners’ equity’ to designate an owner’s investment in the business.

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