Balance sheet (BS) is broken down in three segments:
1. Assets
2. Liabilities
3. Owners Equity
The purpose of this statement is to provide a user with a snapshot of company's financial position.
Liabilities + Owners Equity = Assets
All accounts on the BS reflect balances over lifetime of the company. For this reason, BS accounts are called permanent accounts.
1. Assets
Assets are financial benefits to a company.
Assets are debit accounts.
Common line items:
Cash and Cash Equivalent:
Cash equivalent are highly liquid assets that can be turned into cash within a 90 day period. Examples include:
- Short term bonds
-Treasury bills
Some cash equivalents need to be revalued monthly. Unrealized gains and losses reported thorough profit and loss on income statement. Those assets include:
-Publicly traded stocks.
-Foreign cash
-Precious metals (Gold, Silver)
Accounts Receivable:
Accounts receivable (AR) are uncollected billings. When a payment comes in, AR is reduced and cash account is increased.
Inventory:
Inventories are assets which are kept for sale under normal course of the business. For example:
A commercial kitchen equipment dealership keeps commercial ovens for sale and records it under inventory account. XYZ corp is a bakery. XYZ corp purchases 5 ovens. XYZ corp normally does not sell ovens and, therefore, will record the purchase under Property Plant & Equipment line item.
Prepaid Expenses:
When expense is prepaid and not yet consumed by the company, it is recorded as an asset on the company's BS. This line item shows users of a financial statements that company has a benefit to utilize in the future for which it does not have to pay for (because it was already paid for). Common example is commercial rights to an asset, such as, franchise rights.
Property Plant and Equipment:
Property plant and equipment (PP&E) records real property, manufacturing facilities and specialized equipment that is used by the company in its regular operations. Under certain conditions, assets under this account will require impairment testing. Depreciation is recorded for structures and equipment.
Accumulated Depreciation:
Accumulated depreciation is a contra asset account. Records depreciation of all assets.
2. Liabilities
Liabilities are financial obligations of the company.
Assets are credit accounts.
Common line items:
Accounts Payable:
Expenses for which a company is liable for but has not yet been paid.
Unearned Revenue.
Unearned revenue is an amount for goods and services a company has received a payment for but has yet to provide those goods or services. This line item shows amount of revenue for which a company is yet to incur expense for. For example:
XYZ Corp. is a bakery that received a payment in full for 6 months of shipments of their baked goods. XYZ Corp. will record cash received and record the same amount under unearned revenue account. Unearned revenue is then amortized in stages as goods get delivered.
Debt:
Debt consists of financial liabilities on which interest is paid on. Common examples of debt are mortgages, credit loans and credit card balances for small companies.
Lease Obligations:
Lease obligations reflect rights to use an asset. Most common example is an office, retail or a vehicle lease. Lessor must record full value of lease payments discounted to present day using implicit rate in the contract where available or lessees borrowing rate.
3. Owners Equity
Owners equity can be a debit or a credit account. Net income as well as owners deposits and withdrawals are recorded in the owners equity account.
A credit balance owner equity account means (over lifetime of a company):
Owners Deposits + Net Income > Dividends + Net Losses
A debit balance owner equity account means (over lifetime of a company):
Owners Deposits + Net Income < Dividends + Net Losses