ACTBAS1

Unit II Balance Sheet Overview Background

As a means of telling interested people about business operations, accounting performs important important tasks of recording daily daily transactions, transactions, classi classify fying ing recorded data, summarizing recorded and classified data and interpreting the summarized facts. In all business enterprises, accounting information is summarized in at least two basic financial reports. One of these financial reports shows what the business is worth in terms of the properties it owns (i.e., the assets), the debts it owes (i.e., the liabi liabilit lities), ies), and the investment of its owners (i.e., the proprietorship). propriet orship). !his report repo rt is called the balance sheet and and this statement informs the users of the financial condition of the business at a given date, usually at the end of an accounting period.

Purpose

!he purpose of "nit II #!he $alance %heet & Assets, 'iabilities and Owners *uity (%ervice $usiness)+ is to illustrate different forms of balance sheet and how to prepare them. %tudents will also be introduced in analyzing business transactions using using the accounting e*uation.

In this unit

!his unit contains the following topics Topics -orms of $alance %heet /arts of the $alance $alance %heet Accounting *uation 2urrent Assets /lant, /roperty and *uipment *uipment 2urrent 'iabilities 'ong&!erm 'iabilities Owners *uity 8ebit and 2redit of $alance %heet Items

Marivic D. Valenzuela-Manalo

See Page  of $ 0 of $ 1 of $ 3 of $ 45 of $ 4 of $ 46 of $ 47 of $ 40 of $

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Forms of Balance Sheet

Overview

As provided in the revised /hilippine Accounting %tandard (/A%) 4 based on the International Accounting %tandards (IA%), the balance sheet should be prepared following the new accounting concept of materiality and aggregation, i.e., a separate schedule would be attached to the report to e9plain the amounts with corresponding :notes:. It is also re*uired that a separate statement of changes in e*uity be prepared, and therefore, the owner;s e*uity section of the balance sheet would show only the ending balance of the capital account as shown in the given illustration. !he following discussions will provide readers information on how the account and report format of balance sheets may be prepared.

Account Form

In the account form of balance sheet, the assets are listed on the left side of the report and the liabilities and proprietorship on the right side. !he e9ample below illustrate the account form JOSEPH LABA!O" #O$PA%& $alance %heet 8ecember 64, 5
LIABILITIES A%! O'%E(S E)*IT&

#urrent Assets 2ash = cash e*uivalents (1) / 5,555 45,555 Investments in trading securitie s !rade = !rade >eceivables (3) 65,555 /repaid 9penses (?) ?,555 !otal 2urrent Assets / 3?,555 %on #urrent Assets /roperty, /lant = *uip (45)

TOTAL ASSETS

#urrent Lia+i,ities !rade = Other /ayables (44) / 00,555 2urrent /ortion of mortgage /ayable 5,555

!otal 2urrent 'iabilities

/ 10,555

%on #urrent Lia+i,ities @otes /ayable (due in 6 years) / 15,555 ortgage payable 435,555 !otal non current liabilities 05,555 !otal liabilities / 60,555 Owner(s E-uit. 'abrador, 2apital 000,555 TOTAL LIABILITIES P//0"000 A%! O'%E(S E)*IT& P //0"000 BBBBBBB BBBBBBB

1?4,555

Continued on next page


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eport Form

A balance sheet prepared in report form shows the assets on the top section of the statement and the liabilities and owners e*uity on the bottom section. !he e9ample below illustrate the report form JOSEPH LABA!O" #O$PA%& $alance %heet 8ecember 64, 5<4 ASSETS #urrent Assets 2ash = cash e*uivalents Investments in !rading %ecurities !rade = Other >eceivables /repaid 9penses !otal 2urrent Assets %on #urrent Assets /roperty, plant = e*uipment

%otes (1)

(3) (?)

/ 5,555 45,555 65,555 ?,555 / 3?,555

(45)

1?4,555 / 335,555 BBBBBBB

TOTAL ASSETS

LIABILITIES A%! O'%E(S E)*IT& #urrent Lia+i,ities !rade = other payables 2urrent portion of mortgage payable !otal 2urrent 'iabilities %on #urrent Lia+i,ities @otes /ayable (due in 6 years) ortgage /ayable !otal @o 2urrent 'iabilities

(44)

/ 00,555 5,555 / 10,555

/ 15,555 435,555 05,555

!otal 'iabilities Owner1s E-uit. Coseph, 2apital

/ 60,555

000,555

TOTAL LIABILITIES A%! O'%E(S E)*IT&


/ 335,555 BBBBBBB

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Continued

%otes

@ote 1 & 2ash = cash e*uivalents 2ash on Dand 2ash in $ank !otal cash and cash e*uivalents @ote 3 E !rade = other receivables Accounts >eceivable 'ess Allowance for 8oubtful Accounts @otes >eceivable Interest >eceivable Advances to mployees !otal trade = other receivables @ote ? E /repaid e9penses Office %upplies on Dand /repaid Insurance /repaid Advertising !otal /repaid e9penses @ote 45 E /roperty, plant = e*uipment 'and $uilding 'ess Accumulated 8epreciation Office *uipment 'ess Accumulated 8epreciation -urniture = -i9tures 'ess Accumulated 8epreciation !otal 2arrying value @ote 44 E !rade = other payables Accounts /ayable @otes /ayable Interest /ayable Accrued %alaries 9pense "nearned >ent Income !otal trade = other payables


/ 0,555 40,555 / 5,555 BBBBBB / 5,555 4,55 / 43,355 1,055 155 6,555 / 65,555 BBBBB / F,555 5,555 6,555 / ?,555 BBBBB 655,555 705,555 15,555 445,555 5,555 0,555 7,555

635,555 ?5,555 4,555 1?4,555 BBBBB 5,555 43,555 ,555 0,555 45,555 00,555 BBBBB

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Parts of the Balance Sheet

Overview

!his portion will enumerate the different parts of a balance sheet and their corresponding placement in the financial report being prepared.

Statement Heading

Includes the name of the business, tells the kind of statement it is, and gives the date for which the report is prepared

Asset" Lia+i,it." Proprietorship

Items are grouped and each group of items is identified by special captions.

#aptions

2lassification of each group of items appear against the left margin of the statement.

Account tit,es

Individual account titles in each classification are indented.

#urrent Assets

!he individual current assets are usually listed in order of their liquidity, with the most li*uid asset, #2ash+ appearing first.

P,ant" Propert." E-uipment

!he plant assets are often listed in order of their e9pected useful life with the assets with the longest e9pected useful life, #'and+ appearing first.

%ote 234

!he separate schedule attached to the report e9plaining in detail the aggregated amount presented on the face of the financial statement. Continued on next page


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Continued

#urrent Lia+i,ities

!he current liabilities are in theory listed in order of due date, with the debt with the earliest due date appearing first.

#aptions Indicating Tota,s

ach group of items (i.e., total current assets, total plant, property and e*uipment, total current liabilities, etc.) is indented further.

Sing,e u,e Line

!he last figure in each group of items is underlined.

Fina, Tota,s

!he two final totals (i.e., total assets and total liabilities and owners e*uity) appear as the last line in their respective sections and are underlined twice (double ruled) to indicate a final total.

Peso Sign

Peso Amount

/eso signs are used (a) to the left of the first amount of a group of amounts being combined and (b) to the left of each final total.

!he peso amount for the detailed items is shown in one columnG the total of each classification is e9tended into the last column on the right&hand side of the statement.


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Accounting Equation

Overview

One important feature of the balance sheet relates to a very simple fact. !he balance sheet of any business must show total assets e9actly e*ual in amount to the sum of the liabilities and the capital. !his relationship e9ists regardless of the size of the enterprise or the variety of its assets, liabilities and ownership interest. !his identity is called the basic accounting equation. Often it is stated as ASSETS

5

LIABILITIES

6

O'%E1S E)*IT&

Hhich means, assets e*ual liabilities plus proprietorship. Other times the e*uation appears as ASSET 7 L IABILITIES

5 O'%E1S E)*IT&

or ASSET 7 O'%E1S E)*IT& 5 L IABILITIES

Assets

!his includes anything owned or possessed by the business which is capable of being e9pressed in terms of money or possessing monetary values , and which, conse*uently, is available for the payment of the debt of the business. In short, assets represent the resources of the business.

Lia+i,ities

conomic obligations (i.e., debts) payable to an individual or an organization outside the business.

Owner1s E-uit.

!he claim of an owner of a business over the assets of the business after the claims of the creditors have been satisfied.


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Current Assets

Overview

!his includes cash and any other assets that are reasonably e9pected to be converted into cash or consumed during one year or one operating cycle, i.e., whichever is longer.

#ash

2urrency, coins and checks that the business has received from customers and other sources that have not yet been deposited in its bank account, as well as the amount the business has on deposit in its bank account, against which checks may be drawn in payment of bills.

Investments in Trading Securities

%hort&term investment in stocks of other business (also known as marketable securities).

%otes eceiva+,e

!he amount due in the near future from persons or companies on the basis of their formal, written promises to pay cash to the business on the date specified in the promissory note.

Interest eceiva+,e

!he amount of interest due as of the balance sheet date on notes received from customers.

Accounts eceiva+,e

!he total amount owed to the business by charge account customers.

Advances to emp,o.ees

2ash advance given to an employee to be li*uidated in the form of service.

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$erchandise inventor.

!he purchase price of the particular line of goods the business e9pects to sell to its customers for cash or on a charge account basis. !his represents goods on hand as of the balance sheet date.

Accrued Income

Income already earned but not yet collected, such as interest earned on promissory note issued by the customer before the maturity date of the note.

Supp,ies on hand

!he cost value of such things as wrapping paper and packaging tape and twine, (%tore %upplies on Dand), computer ribbons, envelopes, stamps, paper (Office %upplies on Dand) , and other assets of a similar nature that the business will use up in performing its activities.

Prepaid insurance

!hat part of the premium cost of all kinds of insurance carried by the business after the balance sheet date. /repaid insurance is always classified as a current assets even if the amount of the une9pired premiums cover a period longer than one year, the time limit used in defining current assets.

Prepaid rent

>ent paid by the business for facilities to be used after the balance sheet date. -or e9ample, on 8ecember 4, 5<4, a business paid /65,555 for 8ecember, Canuary, and -ebruary rent. On a balance sheet dated 8ecember 64, 5<4, the amount of /repaid >ent would be shown as /5,555 the amount paid for the use of the facilities for Canuary and -ebruary, 5<.


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Plant, Propert an! Equipment

Overview

Assets are classified as plant, property and e*uipment if they meet the following criteria (4) they must have physical e9istenceG () they must be more or less permanent in natureG (6) they must not be for saleG (7) they must be used in business operationsG and (0) they must undergo depreciation (e9cept land). (/efianco, ., ercado,>., 4?36)

Land

!he cost of land the business uses to carry on its activities & the lot on which its factory or office building stands.

Bui,ding

!he original cost less accumulated depreciation is shown to give the depreciated value of the structures in which the business carries on its operation. !his item could be separated into such things as -actory $uilding, Office $uilding, Harehouse, and any other type of building the business wishes to show on its statement of financial position.

E-uipment

!he original cost less accumulated depreciation is shown to give the depreciated value of the e*uipment used in the operations of the business. !he title e*uipment may also be separated into whatever special assets of this type the business cares to identify. !he business may use such titles as Office Equipment for the value of the adding machines, calculators, and typwritters the office employees use, and Delivery Equipment , for the value of the trucks and automobiles the business uses to deliver its merchadise to customers. A manufacturing enterprise would probably show the value of the machines in its factory as Factory Machinery and Equipment . Continued on next page


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Furniture and Fi8tures

!he original cost less accumulated depreciation is shown to give the depreciated value of furniture and fi9tures used in the operation of the business. !he title -urniture and fi9tures almost e9plains itself and may also be subdivided. 8esks and chairs and counters used by office employees might be listed as Office Furniture and Fixtures . 8isplay cases, chairs used by customers, and merchandise counters in a department store could be entitled Store Furniture and Fixtures.

Accumu,ated !epreciation

All property and e*uipment accounts e9cept land are subect to depreciation. 8epreciation is the allocation of the cost of a property account to its period of usefulness in order to recognize a decline in its value because of wear and tear, obsolescence or inade*uacy. !he total amount of depreciation accumulated over a number of years is called accumulated depreciation.


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Current "ia#ilities

Overview

2urrent liabilities are debts or obligations of a business that are e9pected to be li*uidated by the use of assets classified as current or by the creation of another current liability.

Accounts pa.a+,e

!he total amount owed by the business as of balance sheet date for purchases of merchandise, supplies, and services made on a charge account basis and due within one year from the balance sheet date.

%otes Pa.a+,e

!he amounts owed by the business on the basis of formal, signed notes such as the thirty&day or si9&month notes signed when borrowing from a bank. If merchandise is bought and the creditor re*uires the business to sign a note for the amount of the purchase, the title Notes Payable is used. If the same business borrowed from a bank, the liability may be shown also as @otes /ayable. !his is classified as current liability if the note is due within one year.

Interest Pa.a+,e

!he amount of interest owed by the business as of balance sheet date for money borrowed on interest bearing promissory notes issued by the firm. !his interest debt builds up each day. !he loan is outstanding&the interest accrues& and it is shown as a separate liability apart from the face value of the note, which appears in the @otes /ayable account.

!e9erred Income

Income already collected but not yet earned. >ental payment received by the lessor from the lessee may be treated as unearned rent income by the former.

Ta8es Pa.a+,e

!he amount of ta9es owed by the business as of balance sheet date.


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"ong$%erm "ia#ilities

Overview

%otes Pa.a+,e Long Term

Insta,,ment #ontracts Pa.a+,e

$ortgage Pa.a+,e

'ong&term liabilities are debts or obligations that will become due and payable after one year from balance sheet date.

Amounts on signed formal notes due after one&year from the date of the balance sheet.

Amounts payable after one year from the balance sheet date on long&term installment notes, such as those signed by the consumers when buying automobiles and household appliances. Installments due within one year from the balance sheet date are listed as current liabilities.

A debt due after one year from the balance sheet date that has some of the business property, such as land, buildings, or e*uipment&pledged as security.


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Owner&s Equit

Overview

Owners e*uity or sometimes called capital or proprietorship is the e9cess of assets over liabilities of a business.

#apita,

!he amount invested in the business by the owner as of the balance sheet date.

'ithdrawa,

Hhen the owner withdraws cash or other assets from the business for personal use, its assets and its owners e*uity both decrease. !he amounts taken out of the business appear in a separate account entitled Hithdrawals, or 8rawing. If withdrawals were recorded directly in the capital account, the amount of owner withdrawals would be merged with owner investments. !o separate these two amounts for decision&making, businesses used a separate account for Hithdrawals. !his account shows a decrease in owners e*uity.


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'e#it an! Cre!it of Balance Sheet Items

Overview

Analyzing business transactions would involve a dual effect in any of the elements of the accounting e*uation. !hese dual effects would be analyzed and recorded in terms of debit and credit. !his part of the study guide will introduce the readers on the basic understanding of the rules of debit and credit affecting balance sheet items.

Account

!he basic summary device of accounting is the account. !his is a detailed record of the changes that have occurred in a particular asset, liability or owners e*uity during a period of time.

T7Account

-or the purpose of analyzing the balance items into debit and credit, we will be using in our illustrations the !&account. It takes the form of the capital letter #!+. !he vertical line in the letter divides the account into its left and right sides. !he account title rests on the horizontal line. -or e9ample, the cash account of a business appears in the following !& account format

2A%D 'eft side !e+it

>ight side #redit

!he left side of the account is called the debit side, and the right side is called the credit side. Often beginners in the study of accounting are confused by the words debit and credit. !o become comfortable using them, simply remember debit B left side credit B right side !he type of an account determines how increases and decreases in it are recorded. Increases in assets are recorded in the left (the debit) side of the account. 8ecreases in the assets are recorded in the right (the credit) side of the account. 2onversely, increases in liabilities and owners e*uity are recorded by credits. 8ecreases are recorded by debits. Continued on next page


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Accounting E-uation

!his pattern of recording debits and credits is based on the accounting e*uations A%%!%

K"I!L >ules of 8ebit and 2redit

I,,ustration

8ebit for Increase

B

2redit for 8ecrease

'IA$I'I!I%

8ebit for 8ecrease

2redit for Increase

J

OH@>%

8ebit for 8ecrease

2redit for Increase

!he following e9amples illustrate the accounting e*uations Coseph 'abrador invested /455,555 cash to begin his accounting business. A%%!%

B

'IA$I'I!I%

J OH@>% K"I!L

2ash

'abrador,

2apital 8ebit for increase /hp 455,555

2redit for increase /hp 455,555

!he business purchased office supplies on account for /0,555. A%%!%

B

Office %upplies /ayable 8ebit for increase /hp 0,555

'IA$I'I!I%

J OH@>% K"I!L Accounts 2redit for increase /hp 0,555 Continued on next page


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Continued

I,,ustration" con1t:

!he following e9amples illustrate the continuation of the accounting e*uations !he business paid one year rental for its office space, /7,555. A%%!%

B

'IA$I'I!I%

/repaid >ent

J OH@>% K"I!L 2ash 2redit for increase /hp 7,555

8ebit for increase /hp 7,555

!he business paid M of the amount owed in buying office supplies. A%%!%

B

Accounts /ayable 8ebit for increase /hp ,055


'IA$I'I!I%

J OH@>% K"I!L 2ash 2redit for increase /hp ,055

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ACTBAS1

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