The Balance Sheet Equation
The balance sheet answers another set of crucial questions for a company. Today, what is my company worth? What’s in my bank account? How much money do other companies or people owe me? How much money do I owe other people or companies? Thus, the balance sheet is the accounting equation. It lists the firm’s assets, liabilities, and equity as of a specific date. In this respect it’s a position statement rather than flow statement. The balance sheet is a ”still picture” of business while the income statement might be compared to a “moving picture”. The balance sheet is the company’s solvency report card. Typically, the date on the balance sheet is the end of the firm’s reporting fiscal year. However, computer software has made generating reports vastly easier. It’s not uncommon for a manager to run off last night’s balance sheet to read with coffee in the morning.
The balance sheet always balances because of the double entry system and debit-credit recording rule correctly applied.
Each asset increase in the equation must have one or more of the following:
• asset decrease
• liability increase
• equity increase
• revenue increase
• gain increase
• expense decrease
• loss decrease
The fundamental equation of accounting underlies the balance sheet. It looks like this:
assets = liabilities + equity
assets – liabilities = equity
assets – equity = liabilities
The physical layout of the balance sheet matches the first equation:
assets = liabilities + equity
This makes logical sense: the value of what the company owns (assets) minus the value of what the company owes (liabilities) leaves you with what the company is worth (equity).
The balance sheet becomes a more useful statement for comparison and financial analysis if the asset and liability groups are classified. For example, an important index of the financial state of a business, derivable from the classified balance sheet, is the ratio of current assets to current liabilities. This current ratio should generally be at least 2:1; that is, current assets should be twice current liabilities.
The close relationship of the income statement and the balance sheet is apparent. The income statement is the connecting link between two balance sheets.
Text 3
Income Statement
General Widget.Inc.
December 31,2008
In USD
| Account Names | Account Sums | Aggregated Sums and Totals |
| Sales Revenue Cost of Sales Materials Labor Overhead | 575,000 825,000 350,000 | 3,500,000 1,750,000 |
| Gross Margin | 1,750,000 | |
| Operating Expense Selling General and Administrative Depreciation and Amortization | 750,000 650,000 100,000 | 1,500,000 |
| Operating Income | 250,000 | |
| Other Income and Expenses Dividends and Interest Interest Expense Unusual/Extraordinary Items | 25,000 (75,000) 150,000 | 100,000 |
| Income Before Tax | 350,000 | |
| Income Tax (t =.34) | 119,000 | |
| Net Income | 231,000 |
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General Widget, Inc.
Balance Sheet
December 31, 2008
| Assets | |
| Current Assets | |
| Cash Accounts Receivable Marketable Securities Inventory Prepaid Expenses | 350,000 500,000 68,000 444,400 15,000 |
| Total Current Assets | 1,377,400 |
| Property, Plant, Equipment | |
| Land Buildings Machinery Furniture and Fixtures Vehicles Accumulated Depreciation | 600,000 1,100,000 1,390,000 300,000 315,000 95,000 |
| Net Property, Plant, Equipment | 3,800,000 |
| Total Assets | 5,177,400 |
| Liabilities | |
| Current Liabilities | |
| Accounts Payable Notes Payable Accrued Expenses Income Taxes Payable | 580,000 199,000 95,000 43,400 |
| Long-Term Liabilities | |
| Deferred Taxes Long-Term Debt | 350,000 2,000,000 |
| Total Liabilities | 3,267,400 |
| Total Current Liabilities | 917,400 |
| Shareholder Equity | |
| Preferred Stock Common Stock Paid-in Capital Retained Earnings | 200,000 1,190,000 420,000 100,000 |
| Total Shareholder Equity | 1,910,000 |
| Total Liabilities and Shareholder Equity | 5,177,400 |
6. Match the terms and their definitions; translate into Russian/ Belarusian.
A.
a) assets; b) long-term liabilities; c) balance sheet; d) fixed asset; e) accounts receivable; f) income taxes payable; g) accrued expenses h) marketable securities; i) operating expenses; j) financial statements; k) deferred income taxes; l) notes payable; m) liabilities; n) income and expense statement; o) inventory; p) current assets; q) revenue; r) accounts payable; s) expenses; t)journal.
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B.
1.Money due from customers for goods and services.
2.Expenses that will be due but have not yet been paid.
3. Stocks, bonds, or other financial instruments held by the company.
4. A ll expenses or resources consumed in obtaining revenue.
5.The decrease in capital caused by the business’s revenue-producing operations.
6.An estimate of the taxes that would be due if assets were sold at stated value.
7.Long-lived assets used in the production of goods or services.
8.Afinancial statement that shows the financial position—that is, the assets, liabilities, and value (equity)—of a company on a particular day.
9.A document that shows all of the gozintaand gozouta for a business during aparticular period of time. equity is the financial value, or worth, of a company.
10.A loan or obligation to be paid, current portion of a long-term debt.
11.Goods available for sale.
12.Assets reasonably expected to be converted into cash or used in the current operation of the business (generally taken as one year).
13. The book of original entry for accounting data.
14.Taxes due in the current year.
15.Properties that are owned and have money value—for instance, cash, inventory, buildings, equipment.
16.Amounts owed to outsiders, such as notes payable, accounts payable, bonds payable.
17.The increase in capital resulting from the delivery of goods or rendering of services by the business.
18.Money the company owes to vendors for good or services rendered.
19.A set of accounting documents prepared for a business that cover a particular time period and describe the financial health of the business
20.Liabilities that are payable beyond the next year.
7. Fill in the blanks by inserting the following; translate into Russian/ Belarusian paying attention to terms and their contextual meaning.
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A.
a) income statement; b) equation;;c) equity; d) entity; e) fiscal; f) expenses; g) inventory; h) solvency; i)general and administrative; j) double entry; k) debit; l) credit; m) trial balance; n) selling; m)ledger; o) accounts; p) loss; q) current liabilities; r) current assets; s) still picture; t) moving picture
B.
1. An important index of the financial state of a business, derivable from the classified balance sheet, is the ratio of … … to … …, i.e. the current ratio.
2. The balance sheet is a ” … …” of business while the income statement might be compared to a “ … …”.
3. The … revenue – expenses = net income—is the key to the income statement.
4. Assets, liabilities and… are connected by a fundamental relationship called the accounting equation.
5.Examples of current assets are cash, notes receivable, accounts receivable, …, and prepaid expenses.
6……. expenses are those related to the overall activities of the business, such as the salaries of the president and other officers.
7. … expenses are related to the promotion and sale of the company’s product or service.
8. The income statement may be defined as a summary of the revenue(income), expenses, and net income of a business… for a specific periodof time.
9. When we’re spending more than we’re making, that money is a negative number, called net ….
10. The process of transferring information from the journal to the… for the purpose of summarizing is called posting.
11. The result here is simple arithmetic: revenue (the gozinta) minus … (the gozouta) yields net income.
12. Typically, the date on the balance sheet is the end of the firm’s reporting …year.
13. The balance sheet is the company’s … report card.
14. The abbreviations for … and… are Dr. and Cr., respectively.
15.But, in double-entry bookkeeping, all transactions are entered twice, so that all … are balanced.
16. At the end of the accounting period a two-column schedule called a … …, which compares the total of all debit balances with the total of all credit balances is prepared.
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17. The balance sheet always balances because of the… … system and debit-credit recording rule correctly applied.
8. Find the following information in texts 1-3; translate it into Russian/ Belarusian paying attention to the terms and their contextual usage:
-accounting and bookkeeping- same or different;
- three basic concepts of accounting;
-types of accounts grouping and listing;
-the concept of double entry;
-structure and composition of the T-account;
-process of entering the transactions in the accounting journal in
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