Changes to the Balance Sheet
Practice As You Learn
Introduction to Accounting
Changes to the Balance Sheet
Practice as You Learn
Know and understand the meaning of all the common names discussed on the Balance Sheet topic of this website.
Read each transaction and identify the common items that are changing.
For each item reported on the balance sheet:
1) Remember what the account name means
2) The meaning of the word will describe what has happened.
Practice Problem 1.
Read the balance sheet and state the transactions the company has done since the beginning of the business (cumulative.)
Answer
1) The common stock account represents investors (owners) gave $100,000 cash to the company in exchange for ownership.
2) The notes payable account ($20,000) represents money owed to the bank.
3) The company used the money received from owners and from the bank to purchase vehicles and equipment that cost $20,000 and $40,000 respectively.
4) The company paid $10,000 to obtain a patent to protect the use of something innovative.
5) The company paid $5,000 for insurance coverage before the coverage is provided.
6) The company has $45,000 cash in the bank to use to operate the business.
Practice Problem 2. Identify the common name that is used on the balance sheet for the items that change with the following transactions.
a. The company borrowed money from a bank to be repaid in two years
b. The company paid for rent ahead of the time the space will be used
c. The company purchased items to be sold to customers; on account
d. The company purchased machines used to make products; paid cash
e. The company received money from investors for ownership
f. The company paid to protect a technological invention
g. The company paid for the right to use a symbol and name
h. The company purchased items that will be used up in day to day operations; on account
i. The company invested money in another company
j. The company loaned money to another company. The loan is expected to be collected in six months.
Answer
- The company borrowed money from a bank to be repaid in two years.
Cash and Long-term Notes Payable (or long term debt) - The company paid for rent ahead of the time the space will be used
Cash and Prepaid Rent - The company purchased items to be sold to customers; on account
Inventory and Accounts Payable - The company purchased machines used to make products; paid cash
Equipment (or machines) and Cash - The company received money from investors for ownership
Cash and Common Stock - The company paid to protect a technological invention
Cash and Patent - The company paid for the right to use a symbol and name
Cash and Trademark - The company purchased items that will be used up in the day to day operations; on account
Supplies and Accounts Payable - The company invested money in another company
Cash and Investments (or marketable securities) - The company loaned money to another company. The loan is expected to be collected in six months.
Cash and Short-term Notes Receivable
Practice Problem 3.
Prepare a balance sheet from the following transactions.
1) Received $25,000 cash from investors for ownership.
2) Purchased $10,000 of items to be sold to customers; on account
3) Paid $1,500 for insurance coverage for the next six months
4) Purchased pens, paper, folders, etc. for $500 on account
5) Borrowed $5,000 from the bank (to be repaid in two years) and paid $5,000 cash
for computer equipment.
Answer
First:
determine what changes with each transaction:
1) More cash and more common stock; $25,000
2) More inventory and more accounts payable (owe); $10,000
3) Less cash and more prepaid insurance; $1,500
4) More office supplies and more accounts payable (owe); $500
5) More cash and more long-term notes payable; $5,000 and less cash and more computer equipment; $5,000
Second:
Net the cash received and paid; this amount will be reported on the balance sheet for cash.
25,000 – 1,500 + 5,000 – 5,000 = 23,500
Third:
List all the items that changed in the proper place on the balance sheet
Fourth:
Add the cumulative (net) amount that goes with the account to the balance sheet.
