|Total Assets||$35,000||Total Liabilities & Stockholders' Equity||$35,000|
|Accounts Receivable||5,000||Accrued Expenses Payable||2,000|
|Inventory||8,000||Income Tax Payable||1,000|
|Prepaid Expenses||1,000||Short-Term Notes Payable||2,000|
|Current Assets||$18,000||Current Liabilities||$8,000|
|Property, Plant, & Equipment||$16,000||Long-Term Notes Payable||$5,000|
|Cost Less Depreciation||$12,000||Capital Stock||$7,000|
|Intangible Assets||$5,000||Stockholders' Equity||$22,000|
|Long-Term Operating Assets||$17,000|
The left side of a balance sheet lists assets. The right side lists liabilities on the top, because they have a higher claim on the assets. Sources of stockholders’ equity are listed below the liabilities, to emphasize that owners in a business have a secondary claim on the assets – AFTER the liabilities are satisfied.
Each asset, liability, and stockholders’ equity account has a name and a balance.
The balance sheet is created at the close of business on the last day of the income statement period. So if the income statement is for the year ending June 30, 2011, the balance sheet is created at midnight June 30, 2011.
Balance sheet accounts are divided into the following classes, and in the following order:
Current assets are cash, and other assets that’ll be converted to cash during the operating cycle. The operating cycle is the sequence of buying or making products, holding them until sale, selling them, waiting to collect the receivables, and receiving cash from customers. This basic rhythm of a company’s operations is repeated over and over.
Assets that aren’t included in the operating cycle, such as short-term loans to employees, are included in current assets if they’ll be converted to cash during the coming year. Prepaid expenses, which are goods and services that’ll be received in the future, are also included in current assets.
Long-Term Operating Assets
Long-term operating assets aren’t sold to customers. Instead, they’re used in the operations of the business, and they fall in two groups: tangible and intangible assets.
Tangible assets are used over several years, and include buildings, machines, and equipment. They’re reported in the Property, Plant, and Equipment account.
The cost of a tangible asset is charged off over its useful life. Each period of use bears its share of the total cost of each asset, and this allocation of the cost of tangible assets over their useful life is called depreciation.
The total amount that’s been recorded as depreciation expense since the date of acquisition up to the balance sheet date is reported in the Accumulated Depreciation account. Accumulated Depreciation is subtracted from Property, Plant, and Equipment to arrive at the Cost Less Depreciation.
Intangible assets include patents, trademarks, or favorable reputations that give businesses important competitive advantages.
The cost of an intangible asset remains on the books until the business determines that the asset has lost value, or no longer has economic benefit. At that time, the business writes down the original cost of the asset and charges the amount to the amortization expense.
Current liabilities depend on the conversion of current assets into cash for their payment. Other debts that are due within one year of the balance sheet date are put in this group as well.
Long-term liabilities are those with maturity dates that are more than a year after the balance sheet date.
Liabilities are claims on the assets of a business. Cash, or assets that will be converted to cash will be used to pay the liabilities.
Liabilities are also sources of assets. For instance, cash increases when a company borrows money. Inventory increases when a company buys products on credit.
In addition to liabilities, money from the owners is another source of assets in a business. Owners invest money, and the business retains some of its profit, which isn’t distributed to the owners.
The stockholder’s equity account shows where the excess of the company’s total assets over its total liabilities came from. There are two accounts included in stockholder’s equity: Capital Stock and Retained Earnings.
Capital stock is the investment of capital in a business by its owners. Retained earnings is the difference between the net income earned by a business and the amount distributed to its owners.
For more detail on the income statement, check out How to Read a Financial Report by John Tracy.
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