Balance Sheet

Key Things To Know

Financial Accounting

Key Things To Know

Accounts Receivable:

Amounts customers owe the company for goods or services provided; normally collected in 30 to 90 days


Items held only for sale to the customer 

Prepaid Expenses:

Paid in advance before the service is provided; gives future benefit (rent, insurance)


Items that are used up in day to day operations

Notes Receivable:

Amounts owed to the company; normally interest is charged and the note is repaid in longer than 3 months


The company takes their excess cash and invests it in stocks or bonds to earn a return. Investments can be short term or long term


Assets used long-term to generate revenues; they have physical substance (Buildings, Equipment, Autos, Land, Computers)

– Accumulated Depreciation:

The total amount for all prior years (cumulative) of depreciation expense for all prior periods.  This is a contra account subtracted from plant, and equipment

Intangible Assets:

No physical substance – used long-term to generate revenues. The company has the exclusive right to do something; Includes trademarks, copyrights, patents, franchises, goodwill

                          Cash paid to purchase a company
          less   Fair market value of net assets acquired
                                =   Goodwill

Accounts Payable:

Amounts owed to suppliers, normally paid in 30-60 days
Suppliers are those who provide inventory or goods and services over and over again

Accrued Expense:

Both of these are expenses that have not yet been paid

Accrued Liabilities:

that the company owes – examples are:  employee taxes, legal, advertising, bonuses, retirement plans

_________ Payable:

Expenses incurred that have not yet been paid
(Salaries, Rent, Interest, Taxes)
If an amount is large enough, it gets its own line.  If it is not large enough it will be included in accrued expenses.

Unearned Revenues:

Cash received from customers before the good or service is provided.  The company owes the customer a good/service

Current Maturities of Long Term Debt:       

The portion of long –term debt that will be repaid within 1 year

L/T Notes Payable and Long-term Debt:

Amounts owed to banks and other financing companies that will be paid later than one year from now
Amounts due within a year are reported as current maturities of long term debt

Bonds Payable:

Amounts borrowed from investors; normally long-term

Common Stock or Contributed Capital:

Funds received from investors in exchange for ownership – common stock is reported at par value

Additional Paid in Capital:

Amounts over and above par raised from investors from the sale of stock (ownership)

Retained Earnings:

Total of all (cumulative) profits and losses less dividends paid to owners

Treasury Stock:

The company buys and holds its own stock

Operating cycle:

the time it takes a company to spend cash to do business and get the cash back again (buy inventory, pay expenses, sell to the customer and collect from the customer). Usually less than one year.

The balance sheet is listed in the order of liquidity – how soon it will impact cash

Current means the cash is expected to be collected or paid in 1 year or less
Long term/Non-current means the cash is expected to be collected or paid in longer than 1 year

The balance sheet is reported at historical cost; fair market value on the date of the transaction (buy the asset or borrow money)

Assets are not reported at fair market value – unless fair market value is reliable (investments) or there has been a permanent decrease in value 

Internally generated goodwill is not reported on the balance sheet (i.e. a good management team, a good location, name-brand recognition developed over time.)
It is too difficult to determine a reliable value so it is not reported.

The Format of the Balance Sheet:  
Assets:                                                                      Liabilities:

Current:                                                         Current:
            Cash                                                          Accounts Payable
            Accounts Receivable                                 Accrued Expenses (Liabilities)
            Inventory                                                    Unearned Revenues
            Prepaid Expenses                                       “_______” Payables                                    
            Short-term Investments                              Income Taxes Payable
            Short-term Notes Receivable                     Short-term Notes Payable
            Supplies                                                      Current Portion of Long-term Debt
                 Total Current Assets                                    Total Current Liabilities
            Long-term Investments                              Bonds Payable
            Long-term Notes Receivable                     Long-term Debt
                                                                                     Long term Notes Payable               

                                                                                     Total Liabilities
            Property/Plant/Equipment (P/P/E):
                 Less Accumulated Depreciation
                       Net P/P/E                                            Stockholder’s Equity:

            Intangible Assets                                         Common Stock
            Goodwill                                                       Additional Paid in Capital
            Patents, net                                                 Retained Earnings
            Trademarks, net                                              less Treasury Stock
             Copyrights, net                                                                                           
                Total Intangible Assets                              Total Stockholder’s Equity

            Other Assets                                     

            Total Assets                         must =     Total Liabilities & Stockholder’s Equity