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Balance Sheet
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Balance Sheet 1 of 41
Balance Sheet
The balance sheet is one of the four main financial statements. It is also known as the
statement of financial position.
The balance sheet reports a corporation's assets, liabilities, and stockholders' equity as of a
moment or point in time.
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Balance Sheet 2 of 41
The outline of a balance sheet is similar to the accounting equatio n and it must always be in
bala nce. For a corporatio n the main classifications of the balance sheet are:
=
Assets Liabilities + Stockholders' Equity
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B a lance S heet 3 of 41
The balance sheet is the only one of the five main financial statements that reports amounts as of
a moment or point in time. The income statement, statement of comprehensive income, statement
of cash flows, and statement of stockholders' equity all report amounts for a period of time.
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Balance Sheet 4 of 41
The bala nce sheet must be prepared according to generally accepted accounting principles
(referred to as GAAP or US GAAP). These include very complex, detaile d rules and also
some basic underlying principles, guidelines, and concepts such as the cost principle,
matching princip le, fu ll disclosure principle, going concern assumption, conservatism,
materiality, objectivity, and others.
The balance sheet amounts must reflect the following basic principles
(plus others):
cost going concern
matching conservatism
full disclosure materiality
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Balance Sheet 5 of 41
The cost principle means that only the business transactions with a cost that accountants can
measure are recorded and reported on the balance sheet. For example, a company's
excellent reputation, innovative management, and highly respected brand names that were not
purchased will not be reported as assets on the balance sheet. (Yet these might be the
company's most valuable assets.)
The cost p r inc iple means some of a company's most valuable assets will
not appear on its balance sheet including the company's:
- Excellent reputation
- Innovative management and culture
- Highly respected brand names
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Balance Sheet 6 of 41
The cost principle a lso means that assets such as inventory, land, and buildings will be
reported at their cost (orlo wer) and will not be reported at their higher market values.
(However, some marketable investments will be reported at an amount greater than cost.)
Except for the reporting of certain investments, assets are not reported at
more than their cost.
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Balance Sheet 7 of 41
The matching principle requires a company's financia l statements to follow the accrual
method of accoun t ing. (Under this method, the receipt or payment of cash does not
determine when assets, liabilities, revenues, and expenses will be reported on the financia l
statements.)
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Balance Sheet 8 of 41
The accrual method also requires that when a company receives money in advance of earning
it , the balance sheet must report a liability for the amount that is not yet earned . (When the
unearned amount becomes earned, the liability will be reduced and the income statement will
report the amount as revenues.)
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Balance Sheet 9 of 41
The accrual method of accounting also requires that a company's balance sheet report
prepaid expenses as assets until they are used up or have expired. When a prepaid amount
expiresit becomes an expense on the income statement.
For instance,if a company prepays $6,000 in December for a marketing event that will occur
in January, the $6,000 will be reported as an asset on the December balance sheet. In
January the $6,000 will be removed from the balance sheet and will be reported as an
expense on the January income statement.
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Balance Sheet 10 of 41
We have merely introduced two of the many accounting principles that will affect the balance
sheet. You can learn more about the accounting principles by using all of the materials
available from AccountingCoach.com
We will now move on to a discussion of the balance sheet's format and contents.
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Balance Sheet 11 of 41
The heading of the balance sheet will include the company's name, the words "ba lance sheet"
and a date.
The date represents a moment or point in l ime such as the last instant in an accounting period.
We are accustomed to seeing balance sheets with dates such as December 31, March 31,
June 30, etc. However, a balance sheet can have any date. Here's an example of a heading:
ABC Corporation
Balance Sheet
August 31, 2016
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Balance Sheet 12 of 41
After the heading the balance sheet will report the company's assets, liabilitie s, and
stockhold ers' equity. The amounts are based on past transactio ns and are to reflect all of the
accounting principles and procedures.
In addition to the information on the face of the bala nce sheet, the notes or footnotes to the
financia l statements are considered to be part of the balance sheet.
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Balance Sheet 13 of 41
Assets
Assets are a company's resources or things it owns. Assets are reported only if they have
been acquired through a transaction such as a sale, purchase, or donation, and have a future
value. Prepaid expenses are reported as assets.
Assets are the things the company owns. Assets are the resources that
were acquired in a past transaction which could be measured. Assets
have a future value and include prepaid expenses.
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Ba la nc e Sh e et 14 of 41
Assets are usually presented on the balance sheet according to the following classifications:
1. Current assets
2 . Investments
3. Property, plant and equipment
4 . Other assets.
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Balance Sheet 15 of 41
Current assets include cash and assets that will turn to cash within one year of the date
shown in the heading of the balance sheet. (Some industries allow for a slightly different
definition.)
Typically, the current assets are presented in the following order: cash and cash equivalents,
temporary investments, accounts receivable, inventory, supplies, and prepaid expenses. (The
order is roughly the way items are expected to turn to cash.)
The total amount of current assets is also displayed so that it can be compared to the total
amount of current liabilities.
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Here is the typical balance sheet presentation of current assets for a company with inventory:
Current a s s et s
Cash and cash equivalents
Temporary investments
Accounts receivable
Inventory
Cl>
Supplies
Q. Prepaid expenses
E
Ill
Total current assets
dl
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Balance Sheet 17 of 41
Cas h includes currency, coins, checking account balances , and checks received but not yet
deposited. (Cannot include checks dated in the future.)
Cash equ ivalents are highly liquid investments that had a maturity of three months or less
when they were purchased. Examples are money market funds, U.S. Treasury bills, a nd
commercial paper.
Temporary investments are short-term investments that are readily marketable securitie s
where the intentionis to sell within one year of the balance sheet date. It also includes
investments that will mature and turn to cash wit hin one year of the balance sheet date.
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Balance Sheet 18 of 41
Accounts receivable reports the amounts the corporatio n has a right to receive from its
customers as a result of credit sales . Any allowance for uncollectible amounts should be
deducted from the amount of accounts receivable .
Inventory or Inventories reports the cost of the goods that a company has purchased or
produced but has not yet sold. The cost that is reported is dependent on an assumed cost
flow such as FIFO, LIFO, or average. The details of the inventory are included in the notes to
the financial statements.
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Balance Sheet 19 of 41
Supplies are items that will be consumed by the company. For example, when a company
has a significant amount of office supplies on hand, their cost is reported here.
Prepaid expenses are costs that have been paid but have not yet expired. As the costs
expire, the costs will be reported as expenses on the income statement. A common example
is the amount paid for the 6-month or 12-month insurance premiums. Since the insurance
premiums are paid in advance, they are reported as prepaid expenses until they expire. Other
examples include prepaid legal fees and prepaid marketing costs.
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Ba la nc e Sh e et 20 of 41
Investments is the first of the long-term asset classifications. It reports long-term investments
in certain stocks and bonds, real estate investments, property in the process of being sold , the
cash surrender value of lif e insurance policies owned by the company, assets restricted for a
lo ng-term purpose, etc.
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Balance Sheet 21 of 41
Property, plant and equipment is the lo ng-term asset classification for reporting the land,
buildings, equipment, furnishing, automobiles . and other long-term tangible assets used in the
business. Many accountants refer to these assets as the company's fixed assets or as the
company's plant assets.
These assets are reported at amounts no greater than their cost even if their current market
values are greater.
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Balance Sheet 22 of 41
Except for land, the cost of a plant asset must be deprecia ted to expense over the asset's
useful life . The amount that has been deprec iated is reported as accumulated depreciation
andit is deducted from the costs reported under property, plant and equipment.
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Balance Sheet 23 of 41
Other assets is usually the final long-term asset classification and could include deferred
charges such as debt issue costs pertaining to bonds, certain deferred income taxes, goodwill,
and others.
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Balance Sheet 24 of 41
ABC Cofporntlon
Balanc<> Sheet
August 31, 2016
ASSETS
Current assets
Cash & cash equivale n
ls
Temporary investments
Accounts receivable
net lnvenlory
Suppl es
Prepaid Insurance
Total current assets
Investments ( ong-ten n)
Other assets
TOTALASSETS
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Liabilities
Liabilities can be viewed as claims against the company's assets and also as one of the
sources of the company's assets.
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Balance Sheet 26 of 41
Current liabilities are the ob ligatio ns that are payable within one year of the date shown in
the heading of the balance sheet. (Some industries allow for a slig htly different definition.) An
obligation is shown as a current or short-ter m liability only if it will require the use of a current
asset or will create another current lia bility. Current lia bilitie s include amounts received from
customers in advance of being earned.
The total amount of current liabilitie s is also displayed so thatit can be compared to the total
amount of current assets .
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Current liabilities
Short-term notes payable
Current portion of long-term debt
Accounts payable
Income taxes payable
Accrued expenses
Deferred revenues
Total current liabilities
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Ba la nc e Sh e et 28 of 41
Short-term notes payable are the amounts borrowed by a company that must be repaid in
less than one year.
Current portion of long-term debt is the principal amount that is coming due within one year
of the balance sheet date. Mortgage lo ans and vehicle loans are examples of long-term loans
that require principal payments to be made during the one-year period following the date of the
balance sheet.
Accounts payable represents the amounts owed to suppliers/vendors who have provided the
company with goods and servic es on credit. For example, a company has received the goods
and the supplier's related invoice, but the company has 30 days before ii must remit payment.
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Income taxes payable is the amount of income taxes that must be remitted within one year of
the balance sheet date.
Accru ed expenses are the amounts owed for goods and servic es but the suppliers/vendors
have not yet billed the company. This will also include the amounts owed for employee related
wages and benefits that have occurred but have not yet been processed (if these are not
reported separately).
Unearned revenues or deferred revenues are the amounts received from customers in
advance of being earned. As the amounts become earned, this liability is reduced and the
income statement will report the earned amounts as revenues.
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Long-term liabilities (or noncurrent liabilities) are the obligations that will not be due within one
year of the balance sheet date. These include thelo ng-term portion of a mortgage lo an, bonds
payable, deferred income taxes, liability for postretirement or postemplo yment benefits, and
other long-term liabilities.
Included near the end of the long-term liabilities there is often a line that reads "Commitments
and contingencie s (see Notes)". No amount is reported as it s purpose is to inform readers that
the notes to the financia l statements may contain information about potential liabilities.
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Balance Sheet 31 of 41
Bonds payable are debt securities issued by a corporation. Bonds are formal promises to
pay interest (usually every six months) and the principal amount at the maturity date.
Mortgage loans payable is long-term debt that has real estate as collateral. Mortgage lo ans
often require monthly payments of interest and principal. The amount of principal that must be
paid within one year of the balance sheet date is reported as a current liability. The principal
amount that is not due wit hin one year of the balance sheet date is reported here.
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Ba la nc e Sh e et 32 of 41
Postretirement benefits l iability are obligations a company has agreed to pay to its retirees.
For example, if the company agreed to pay the retirees' health insurance cost for the
remainder of the retirees' lives, the cost of that benefit is reported here.
Deferred income taxes represent the income taxes that are not yet due even though they
were reported as income tax expense on the corporation's income statement. Often they are
associated with the difference in the timing of the depreciatio n expense on the tax return
versus the financia l statements.
Commitments and c o nt ingencies is often a line on the balance sheet that does not have an
amount listed. Its purpose is to refer the readers to the disclosures in the notes to the financial
statements.
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Balance Sheet 33 of 41
Stockholders' equity (or owner's equity) is the difference between the total assets and the
total lia bilities. Stockholders' equity includes amounts received from issuing shares of stock and
also from the corporation's net income since the corporation began minus the dividends to
stockholders since the corporation began.
The notes to t he fin ancial statements also provid es additional information about the balance
sheet and the other financial statements.
Stockholders ' equ ity is the difference between the total assets and the
total liabilities for a corporation. (For a sole proprietorship it is named
owner's equity.) Stockholders' equity includes the amounts that were
received when shares of stock were issued plus the amount of earnings
minus dividends since the business began .
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Balance Sheet 35 of 41
Paid-in capital is the amount received by the corporation when it originally issued shares of
it s stock. If preferred stock has been issued, the preferred amount is shown separately from
the common stock. If the stock has a par value, that amount is also shown separately.
Treasury stock is actually a reduction of stockholders' equity. The amount reported is usually
the cost of repurchasing it s shares of stock that have not been retired.
Retained earnin gs is the cumula tive amount of the corporation's earnings minus the
dividends it has declared since the corporatio n was formed .
Accum ulated other comprehensive income reports the amounts for it ems that are not
included in the corporation's earnings or retained earnings. Examples include the unrealized
gain on certain securities and foreign currency translation adjustments.
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Balance Sheet 36 of 41
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Balance Sheet 37 of 41
Since the retained earnings portion of stockholders' equity is increased by the corporatio n's
earnin gs, much of the change occurring during the accounting period can be found on the
income statement.
The change in retained earnings during the most recent accounting period is partially
explained by the corporation's income statement which reports its revenues, expenses, gains,
and lo sses.
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Balance Sheet 38 of 41
A BC Corporation
Ba lance Sheet
August 31, 2016
ASSETS L IABIL ITIES
Current assets Current l iabilities
Cash & cash equiva lents Shortle rm debt
Temporary investments A= unts payable
Accounts receivable • Accrued lia bilities
net In ventory Income taxes payable
Suppl es Deferred revenues
Prepaid Insurance Total current liabi lities
Total current assets
Long -ter m debt
Investments ( ong
.t erm) Deferred income taxes
Other lo ng-termlia bili ties
Property, plant and equip ment Comm itments and contingenc es
Land & buildings Total liabi lities
Fixtures & equipment
Less:Accum Depreciation Stockho lders' equity
Prop, p lant & equip • net Paid·in capital
Less: Treasury stock
Retained earnings
Other assets AOCllm other compreh income
To tal stock h o lders' equ
it y
TOTAL ASSETS TOTAL L IAB & STKHLRS' EQUITY
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Ba la nc e Sh e et 39 of 41
In order for the balance sheet to be more useful, accountants should prepare comparative
balance sheets . Comparative balance sheets will report the amounts for two or three dates .
For example, the balance sheet for March 31, 20 16 will also report the amounts at December
31, 2015 and March 31, 2015. The balance sheet dated December 31, 2016 will als o report
the amounts at December 31, 2015 and 2014.
A comparative balance sheet provides the amounts for two or three dates.
This allows the person reading the balance sheet to compare the recent
amounts to those of an earlier date.
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Balance Sheet 40 of 41
The balance sheet is used by lenders, investors, and suppliers to assess the corporation's
ability to meet its present and future obligations.
For example, the amount of the current assets is compared to the amount of current liabilities
to determine 1) the amount of working capital (current assets minus current liabilities), and 2)
the current ratio (current assets divided by current liabilities).
The balance sheet also indicates the corporation's financial leverage, which is the total
liabilities in relationship to the stockholders' equity or total assets.
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Balance Sheet 41 of 41
Book value
An asset's book value is the asset's cost minus the asset's accumulated depreciation up to the
date of the balance sheet. Depreciation was recorded in order to match the cost of the asset
to the revenues earned by using the asset. The asset's book value does llll1indicate the
current market value of the asset.
The book value of a corporation is the amount of its reported stockholders' equity. In other
words, it is the difference between the amounts reported as assets minus the amounts reported
as liabilities. Since some of the corporatio n's most valuable assets (reputation, brand names,
creative culture) are not reported as assets on the balance sheet, the amount of stockholders'
equity does not indic ate the current market value of the corporation.
You can learn more about the balance sheet from the following resources available in
Accou n t ngCoach PRO, the members area of AccountingCoach.com:
- Video Seminar for Understanding Financial Statements
- Exams for Financia l Accounting
- Expla nation of Balance Sheet
- Quiz for the Balance Sheet
- Q & A for the Balance Sheet
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Ba la nc e Sheet Quiz instructions
QUIZ INSTRUCTIONS
Each question will have two or more possible options for you to choose from, and only one
correct answer. There will be a checkbox next to each answer. Select the best answer.
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Balance Sheet Questions 1 - 5 of 20
5. The valuable brand names that a company has developed over many years are likely to be
(0 excluded from I 0 included in ) the company's assets that are reported on its balance
sheet.
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Balance Sheet Questions 6 - 10 of 20
6.Under the accrual method of accounting, the amount of insurance premiums that have
been paid but have not yet expired should be reported as an ( D asset I D expense ).
7.Under the accrual method of accounting, the amount of insurance premiums that have been
received by an insurance company but have not yet been earned should be reported as
(0 a liability I 0 revenues ) on the insurance company's financial statements .
9.The amount of accumulated depreciation included within the classification Property, Plant
and Equipment is ( 0 added to I 0 deducted from ) the costs of the plant assets.
10. The cost of the land on which a company's warehouse is built should be depreciated .
0 a. true
D b. false
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Balance Sheet Questions 11 - 13 of 20
12.The principal balance, which a company owes on a mortgage loan requiring monthly
payments of interest and principal for the next 11 years, will be reported
D a. as a long-term lia bility only
D b. partly as a current liability and partly as a long-term lia bility
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Balance Sheet Questio ns 14 - 17 of 20
16.A ba lance sheet which reports the amounts for August 31, 2016 and also for August 31,
2015 is known as a ( 0 comparative I 0 multip le step ) balance sheet.
17. The total amount of current assets minus the total amount of current liabilit ies is
(0 owner's equity I 0 working capital ).
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Balance Sheet Questions 18 - 20 of 20
18.The current ratio is the total amount of current assets divided by the total amount of
(0 assets I 0 current liabilities ).
20.The total amount of stockholders' equity that is reported on the balance sheet is usually
equal to the corporation's market value.
0 a. true
0 b. false
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B a lance Sheet Answers 1 - 5 of 20
4. The liabilities reported on the balance sheet are likely to be more complete under the
( !81accrua l I D cash ) method of accounting.
5. The valuable brand names that a company has developed over many years are likely to be
( !81excluded from I 0 included in ) the company's assets that are reported on its balance
sheet.
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Ba la nc e Sh e et Answers 6 - 10 of 20
6.Under the accrual method of accounting, the amount of insurance premiums that have
been paid but have not yet expired should be reported as an ( t8l asset I D expense ).
7.Under the accrual method of accounting, the amount of insurance premiums that have been
received by an insurance company but have not yet been earned should be reported as
( t8l a l iability I 0 revenues ) on the insurance company's financial statements.
8.The bala nce sheet asset section Investments is a ( 0 current I t8l noncurrent)
category or classification.
9.The amount of accumulated depreciation included within the classification Property, Plant
and Equipment is ( 0 added to I t&1deducted from) the costs of the plant assets.
10. The cost of the land on which a company's warehouse is built should be depreciated .
0 a. true
t&1b. false
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Balance Sheet Answers 11 - 13 of 20
12.The principal balance, which a company owes on a mortgage loan requiring monthly
payments of interest and principal for the next 11 years, will be reported
D a. as a long-term lia bility only
b . partly as a current liability and partly as a long-term liability
13. Stockholders' equity includes the amounts received from issuing bonds .
D a. true
!&) b . fals e
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Balance Sheet Answers 14 - 17 of 20
16.A ba lance sheet which reports the amounts for August 31, 2016 and also for August 31,
2015 is known as a ( !:8Jcom parative I 0
multip le step ) balance sheet.
17. The total amount of current assets minus the total amount of current liabilit ies is
(0 owner's equit y I !:8lworking cap ital).
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Balance Sheet Answers 18 - 20 of 20
18. The current ratio is the total amount of current assets divided by the total amount of
(0 assets I @ current liabilities).
20. The total amount of stockhold ers' equity that is reported on the balance sheet is usually
equal to the corporation's market value.
0 a. true
r:83 b. false
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