Unit II

Balance Sheet
Overview

Background As a means of telling interested people about business operations, accounting
performs important tasks of recording daily transactions, classifying recorded
data, summarizing recorded and classified data and interpreting the
summarized facts. In all business enterprises, accounting information is
summarized in at least two basic financial reports.
One of these financial reports shows what the business is worth in terms of the
properties it owns (i.e., the assets), the debts it owes (i.e., the liabilities), and
the investment of its owners (i.e., the proprietorship). !his report is called the
balance sheet and this statement informs the users of the financial condition of
the business at a given date, usually at the end of an accounting period.

Purpose !he purpose of "nit II #!he $alance %heet & Assets, 'iabilities and Owner(s
)*uity (%ervice $usiness)+ is to illustrate different forms of balance sheet and
how to prepare them. %tudents will also be introduced in analyzing business
transactions using the accounting e*uation.
In this unit !his unit contains the following topics,
Topics See Page
-orms of $alance %heet . of $
/arts of the $alance %heet 0 of $
Accounting )*uation 1 of $
2urrent Assets 3 of $
/lant, /roperty and )*uipment 45 of $
2urrent 'iabilities 4. of $
'ong&!erm 'iabilities 46 of $
Owner(s )*uity 47 of $
8ebit and 2redit of $alance %heet Items 40 of $

Marivic D. Valenzuela-Manalo /age 4 of $
Forms of Balance Sheet

Overview As provided in the revised /hilippine Accounting %tandard (/A%) 4 based on
the International Accounting %tandards (IA%), the balance sheet should be
prepared following the new accounting concept of materiality and aggregation,
i.e., a separate schedule would be attached to the report to e9plain the
amounts with corresponding :notes:. It is also re*uired that a separate
statement of changes in e*uity be prepared, and therefore, the owner;s e*uity
section of the balance sheet would show only the ending balance of the capital
account as shown in the given illustration.
!he following discussions will provide readers information on how the account
and report format of balance sheets may be prepared.

Account Form In the account form of balance sheet, the assets are listed on the left side of the
report and the liabilities and proprietorship on the right side. !he e9ample
below illustrate the account form,
JOSEPH LABA!O" #O$PA%&
$alance %heet
8ecember 64, .5<I
ASSETS LIABILITIES A%! O'%E(S E)*IT&
#urrent Assets #urrent Lia+i,ities
2ash = cash e*uivalents (1) / .5,555 !rade = Other /ayables (44) / 00,555
Investments in trading securities 45,555 2urrent /ortion of
!rade = !rade >eceivables (3) 65,555 mortgage /ayable .5,555
/repaid )9penses (?) .?,555
!otal 2urrent Assets / 3?,555 !otal 2urrent 'iabilities / 10,555
%on #urrent Assets %on #urrent Lia+i,ities
/roperty, /lant = )*uip (45) 1?4,555 @otes /ayable
(due in 6 years) / 15,555
Aortgage payable 435,555
!otal non current liabilities .05,555
!otal liabilities / 6.0,555
Owner(s E-uit.
'abrador, 2apital 000,555
TOTAL LIABILITIES
TOTAL ASSETS P//0"000 A%! O'%E(S E)*IT& P //0"000
BBBBBBB BBBBBBB
Continued on next page
Marivic D. Valenzuela-Manalo /age . of $
Continued

eport Form A balance sheet prepared in report form shows the assets on the top section of
the statement and the liabilities and owner(s e*uity on the bottom section. !he
e9ample below illustrate the report form,
JOSEPH LABA!O" #O$PA%&
$alance %heet
8ecember 64, .5<4
A S S E T S
#urrent Assets %otes
2ash = cash e*uivalents (1) / .5,555
Investments in !rading %ecurities 45,555
!rade = Other >eceivables (3) 65,555
/repaid )9penses (?) .?,555
!otal 2urrent Assets / 3?,555
%on #urrent Assets
/roperty, plant = e*uipment (45) 1?4,555
TOTAL ASSETS / 335,555
BBBBBBB
LIABILITIES A%! O'%E(S E)*IT&
#urrent Lia+i,ities
!rade = other payables (44) / 00,555
2urrent portion of mortgage payable .5,555
!otal 2urrent 'iabilities / 10,555
%on #urrent Lia+i,ities
@otes /ayable (due in 6 years) / 15,555
Aortgage /ayable 435,555
!otal @o 2urrent 'iabilities .05,555
!otal 'iabilities / 6.0,555

Owner1s E-uit.
Coseph, 2apital 000,555
TOTAL LIABILITIES A%! O'%E(S E)*IT& / 335,555
BBBBBBB

Marivic D. Valenzuela-Manalo /age 6 of $
Continued

%otes @ote 1 & 2ash = cash e*uivalents
2ash on Dand / 0,555
2ash in $ank 40,555
!otal cash and cash e*uivalents / .5,555
BBBBBB
@ote 3 E !rade = other receivables
Accounts >eceivable / .5,555
'ess, Allowance for 8oubtful Accounts 4,.55 / 43,355
@otes >eceivable 1,055
Interest >eceivable 155
Advances to )mployees 6,555
!otal trade = other receivables / 65,555
BBBBB
@ote ? E /repaid e9penses
Office %upplies on Dand / F,555
/repaid Insurance .5,555
/repaid Advertising 6,555
!otal /repaid e9penses / .?,555
BBBBB
@ote 45 E /roperty, plant = e*uipment
'and 655,555
$uilding 705,555
'ess, Accumulated 8epreciation 15,555 635,555
Office )*uipment 445,555
'ess, Accumulated 8epreciation .5,555 ?5,555
-urniture = -i9tures .0,555
'ess, Accumulated 8epreciation 7,555 .4,555
!otal 2arrying value 1?4,555
BBBBB
@ote 44 E !rade = other payables
Accounts /ayable .5,555
@otes /ayable 43,555
Interest /ayable .,555
Accrued %alaries )9pense 0,555
"nearned >ent Income 45,555
!otal trade = other payables 00,555
BBBBB

Marivic D. Valenzuela-Manalo /age 7 of $
Parts of the Balance Sheet

Overview !his portion will enumerate the different parts of a balance sheet and their
corresponding placement in the financial report being prepared.

Statement
Heading
Includes the name of the business, tells the kind of statement it is, and gives
the date for which the report is prepared

Asset" Lia+i,it."
Proprietorship
Items are grouped and each group of items is identified by special captions.

#aptions 2lassification of each group of items appear against the left margin of the
statement.

Account tit,es Individual account titles in each classification are indented.

#urrent Assets !he individual current assets are usually listed in order of their liquidity, with
the most li*uid asset, #2ash+ appearing first.

P,ant" Propert."
E-uipment
!he plant assets are often listed in order of their e9pected useful life with the
assets with the longest e9pected useful life, #'and+ appearing first.

%ote 234 !he separate schedule attached to the report e9plaining in detail the
aggregated amount presented on the face of the financial statement.
Continued on next page
Marivic D. Valenzuela-Manalo /age 0 of $
Continued
#urrent
Lia+i,ities
!he current liabilities are in theory listed in order of due date, with the debt
with the earliest due date appearing first.

#aptions
Indicating
Tota,s
)ach group of items (i.e., total current assets, total plant, property and
e*uipment, total current liabilities, etc.) is indented further.

Sing,e u,e
Line
!he last figure in each group of items is underlined.

Fina, Tota,s !he two final totals (i.e., total assets and total liabilities and owner(s e*uity)
appear as the last line in their respective sections and are underlined twice
(double ruled) to indicate a final total.

Peso Sign /eso signs are used (a) to the left of the first amount of a group of amounts
being combined and (b) to the left of each final total.

Peso Amount !he peso amount for the detailed items is shown in one columnG the total of
each classification is e9tended into the last column on the right&hand side of
the statement.

Marivic D. Valenzuela-Manalo /age F of $
Accounting Equation

Overview One important feature of the balance sheet relates to a very simple fact. !he
balance sheet of any business must show total assets e9actly e*ual in amount
to the sum of the liabilities and the capital. !his relationship e9ists regardless
of the size of the enterprise or the variety of its assets, liabilities and ownership
interest. !his identity is called the basic accounting equation. Often it is
stated as,
ASSETS 5 LIABILITIES 6 O'%E1S E)*IT&
Hhich means, assets e*ual liabilities plus proprietorship. Other times the
e*uation appears as,
ASSET 7 L IABILITIES 5 O'%E1S E)*IT&
or
ASSET 7 O'%E1S E)*IT& 5 L IABILITIES

Assets !his includes anything owned or possessed by the business which is capable of
being e9pressed in terms of money or possessing monetary values, and which,
conse*uently, is available for the payment of the debt of the business. In short,
assets represent the resources of the business.

Lia+i,ities )conomic obligations (i.e., debts) payable to an individual or an organization
outside the business.

Owner1s E-uit. !he claim of an owner of a business over the assets of the business after the
claims of the creditors have been satisfied.

Marivic D. Valenzuela-Manalo /age 1 of $
Current Assets

Overview !his includes cash and any other assets that are reasonably e9pected to be
converted into cash or consumed during one year or one operating cycle, i.e.,
whichever is longer.

#ash 2urrency, coins and checks that the business has received from customers and
other sources that have not yet been deposited in its bank account, as well as
the amount the business has on deposit in its bank account, against which
checks may be drawn in payment of bills.

Investments in
Trading
Securities
%hort&term investment in stocks of other business (also known as marketable
securities).

%otes
eceiva+,e
!he amount due in the near future from persons or companies on the basis of
their formal, written promises to pay cash to the business on the date specified
in the promissory note.

Interest
eceiva+,e
!he amount of interest due as of the balance sheet date on notes received from
customers.

Accounts
eceiva+,e
!he total amount owed to the business by charge account customers.

Advances to
emp,o.ees
2ash advance given to an employee to be li*uidated in the form of service.

Continued on next page
Marivic D. Valenzuela-Manalo /age 3 of $
Continued
$erchandise
inventor.
!he purchase price of the particular line of goods the business e9pects to sell
to its customers for cash or on a charge account basis. !his represents goods
on hand as of the balance sheet date.

Accrued
Income
Income already earned but not yet collected, such as interest earned on
promissory note issued by the customer before the maturity date of the note.

Supp,ies on
hand
!he cost value of such things as wrapping paper and packaging tape and
twine, (%tore %upplies on Dand), computer ribbons, envelopes, stamps, paper
(Office %upplies on Dand) , and other assets of a similar nature that the
business will use up in performing its activities.
Prepaid
insurance
!hat part of the premium cost of all kinds of insurance carried by the business
after the balance sheet date. /repaid insurance is always classified as a current
assets even if the amount of the une9pired premiums cover a period longer
than one year, the time limit used in defining current assets.

Prepaid rent >ent paid by the business for facilities to be used after the balance sheet date.
-or e9ample, on 8ecember 4, .5<4, a business paid /65,555 for 8ecember,
Canuary, and -ebruary rent. On a balance sheet dated 8ecember 64, .5<4, the
amount of /repaid >ent would be shown as /.5,555 the amount paid for the
use of the facilities for Canuary and -ebruary, .5<..

Marivic D. Valenzuela-Manalo /age ? of $
Plant, Propert an! Equipment

Overview Assets are classified as plant, property and e*uipment if they meet the
following criteria, (4) they must have physical e9istenceG (.) they must be
more or less permanent in natureG (6) they must not be for saleG (7) they must
be used in business operationsG and (0) they must undergo depreciation (e9cept
land). (/efianco, )., Aercado,>., 4?36)

Land !he cost of land the business uses to carry on its activities & the lot on which
its factory or office building stands.

Bui,ding !he original cost less accumulated depreciation is shown to give the
depreciated value of the structures in which the business carries on its
operation. !his item could be separated into such things as -actory $uilding,
Office $uilding, Harehouse, and any other type of building the business wishes
to show on its statement of financial position.

E-uipment !he original cost less accumulated depreciation is shown to give the
depreciated value of the e*uipment used in the operations of the business. !he
title e*uipment may also be separated into whatever special assets of this type
the business cares to identify. !he business may use such titles as Office
Equipment for the value of the adding machines, calculators, and typwritters
the office employees use, and Delivery Equipment, for the value of the trucks
and automobiles the business uses to deliver its merchadise to customers. A
manufacturing enterprise would probably show the value of the machines in its
factory as Factory Machinery and Equipment.

Continued on next page
Marivic D. Valenzuela-Manalo /age 45 of $
Continued
Furniture and
Fi8tures
!he original cost less accumulated depreciation is shown to give the
depreciated value of furniture and fi9tures used in the operation of the
business. !he title -urniture and fi9tures almost e9plains itself and may also be
subdivided. 8esks and chairs and counters used by office employees might be
listed as Office Furniture and Fixtures. 8isplay cases, chairs used by
customers, and merchandise counters in a department store could be entitled
Store Furniture and Fixtures.

Accumu,ated
!epreciation
All property and e*uipment accounts e9cept land are subIect to depreciation.
8epreciation is the allocation of the cost of a property account to its period of
usefulness in order to recognize a decline in its value because of wear and tear,
obsolescence or inade*uacy. !he total amount of depreciation accumulated
over a number of years is called accumulated depreciation.

Marivic D. Valenzuela-Manalo /age 44 of $
Current "ia#ilities

Overview 2urrent liabilities are debts or obligations of a business that are e9pected to be
li*uidated by the use of assets classified as current or by the creation of
another current liability.

Accounts
pa.a+,e
!he total amount owed by the business as of balance sheet date for purchases
of merchandise, supplies, and services made on a charge account basis and due
within one year from the balance sheet date.

%otes Pa.a+,e !he amounts owed by the business on the basis of formal, signed notes such as
the thirty&day or si9&month notes signed when borrowing from a bank. If
merchandise is bought and the creditor re*uires the business to sign a note for
the amount of the purchase, the title Notes Payable is used. If the same
business borrowed from a bank, the liability may be shown also as @otes
/ayable. !his is classified as current liability if the note is due within one year.

Interest Pa.a+,e !he amount of interest owed by the business as of balance sheet date for
money borrowed on interest bearing promissory notes issued by the firm. !his
interest debt builds up each day. !he loan is outstanding&the interest accrues&
and it is shown as a separate liability apart from the face value of the note,
which appears in the @otes /ayable account.

!e9erred
Income
Income already collected but not yet earned. >ental payment received by the
lessor from the lessee may be treated as unearned rent income by the former.

Ta8es Pa.a+,e !he amount of ta9es owed by the business as of balance sheet date.

Marivic D. Valenzuela-Manalo /age 4. of $
"ong$%erm "ia#ilities

Overview 'ong&term liabilities are debts or obligations that will become due and payable
after one year from balance sheet date.

%otes Pa.a+,e
Long Term
Amounts on signed formal notes due after one&year from the date of the
balance sheet.

Insta,,ment
#ontracts
Pa.a+,e
Amounts payable after one year from the balance sheet date on long&term
installment notes, such as those signed by the consumers when buying
automobiles and household appliances. Installments due within one year from
the balance sheet date are listed as current liabilities.

$ortgage
Pa.a+,e
A debt due after one year from the balance sheet date that has some of the
business property, such as land, buildings, or e*uipment&pledged as security.

Marivic D. Valenzuela-Manalo /age 46 of $
Owner&s Equit

Overview Owner(s e*uity or sometimes called capital or proprietorship is the e9cess of
assets over liabilities of a business.

#apita, !he amount invested in the business by the owner as of the balance sheet date.

'ithdrawa, Hhen the owner withdraws cash or other assets from the business for personal
use, its assets and its owner(s e*uity both decrease. !he amounts taken out of
the business appear in a separate account entitled Hithdrawals, or 8rawing. If
withdrawals were recorded directly in the capital account, the amount of
owner withdrawals would be merged with owner investments. !o separate
these two amounts for decision&making, businesses used a separate account
for Hithdrawals. !his account shows a decrease in owner(s e*uity.

Marivic D. Valenzuela-Manalo /age 47 of $
'e#it an! Cre!it of Balance Sheet Items

Overview Analyzing business transactions would involve a dual effect in any of the
elements of the accounting e*uation. !hese dual effects would be analyzed and
recorded in terms of debit and credit. !his part of the study guide will
introduce the readers on the basic understanding of the rules of debit and
credit affecting balance sheet items.

Account !he basic summary device of accounting is the account. !his is a detailed
record of the changes that have occurred in a particular asset, liability or
owner(s e*uity during a period of time.

T7Account -or the purpose of analyzing the balance items into debit and credit, we will be
using in our illustrations the !&account. It takes the form of the capital letter
#!+. !he vertical line in the letter divides the account into its left and right
sides. !he account title rests on the horizontal line.
-or e9ample, the cash account of a business appears in the following !&
account format,
2A%D
'eft side
!e+it
>ight side
#redit
!he left side of the account is called the debit side, and the right side is
called the credit side. Often beginners in the study of accounting are
confused by the words debit and credit. !o become comfortable using
them, simply remember
debit B left side
credit B right side
!he type of an account determines how increases and decreases in it are
recorded. Increases in assets are recorded in the left (the debit) side of
the account. 8ecreases in the assets are recorded in the right (the
credit) side of the account. 2onversely, increases in liabilities and
owner(s e*uity are recorded by credits. 8ecreases are recorded by
debits.
Continued on next page
Marivic D. Valenzuela-Manalo /age 40 of $
Continued
Accounting
E-uation
!his pattern of recording debits and credits is based on the accounting
e*uations,
A%%)!% B 'IA$I'I!I)% J OH@)>(%
)K"I!L
>ules of 8ebit 2redit 8ebit 2redit 8ebit 2redit
8ebit and for for for for for for
2redit Increase 8ecrease 8ecrease Increase 8ecrease Increase

I,,ustration !he following e9amples illustrate the accounting e*uations,
Coseph 'abrador invested /455,555 cash to begin his accounting
business.
A%%)!% B 'IA$I'I!I)% J OH@)>(% )K"I!L
2ash 'abrador,
2apital
8ebit
for increase
/hp 455,555
2redit
for increase
/hp 455,555
!he business purchased office supplies on account for /0,555.
A%%)!% B 'IA$I'I!I)% J OH@)>(% )K"I!L
Office %upplies Accounts
/ayable
8ebit
for increase
/hp 0,555
2redit
for increase
/hp 0,555
Continued on next page
Marivic D. Valenzuela-Manalo /age 4F of $
Continued

I,,ustration"
con1t:
!he following e9amples illustrate the continuation of the accounting e*uations,
!he business paid one year rental for its office space, /.7,555.
A%%)!% B 'IA$I'I!I)% J OH@)>(% )K"I!L
/repaid >ent 2ash
8ebit
for increase
/hp .7,555
2redit
for increase
/hp .7,555
!he business paid M of the amount owed in buying office supplies.
A%%)!% B 'IA$I'I!I)% J OH@)>(% )K"I!L
Accounts /ayable 2ash
8ebit
for increase
/hp .,055
2redit
for increase
/hp .,055
Marivic D. Valenzuela-Manalo /age 41 of $