Balance Sheet Discussion 1

THE BALANCE SHEET
LEARNING OBJECTIVES
1. To understand the financial condition of a business presented in a

balance sheet.
2. To develop the basic skills needed in preparing a balance sheet.

BASIC FINANCIAL STATEMENTS.
 The basic financial statements are the balance sheet. the income
statement, and the statement of changes in financial position.
The balance sheet gives information about the financial
condition of a business as of a given date.
The income statement gives information about the
results of operations for a given period.
The statement of changes in financial position
summarizes the sources and uses of funds for a given
period.
This course in basic accounting is limited to the study of the
balance sheets of small businesses
ELEMENTS OF A BALANCE SHEET.
The balance sheet is a statement, which shows the assets, liabilities and
owner's equity of a business as of a given date. These three elements are
always presented in an equation, which is a formal presentation of the
accounting equation:
ASSETS LIABILITIES + OWNER'S EQUITY
Like any mathematical equation, the accounting equation may also be
expressed as
ASSETS LIABILITIES OWNER'S EQUITY
ASSETS OWNER'S EQUITY-LIABILITIES

ASSETS
 Assets are economic resources owned by a business, which will

benefit future operations. Some assets are tangible or have definite
physical forms
Other assets are intangible and may be in the form of claims or rights.
Some examples of assets are cash, accounts receivable, office furniture,
office equipment, building, and land.
LIABILITIES
Liabilities are debts or obligations of the business, which are

to be paid in cash or in the form of some other non-cash
assets, or are to be settled by rendering some form of
services:
 Some examples of liabilities are accounts payable, notes
payable, salaries payable and deferred income.
OWNER'S EQUITY
 Owner's equity is the residual claim of the owner in the assets of a

business after satisfying the claims of the creditors. Thus
If the assets of a business are-P5,000
and its liability to Deluxe Furniture being-P2,000
Then, owner's equity is- P3,000
Owner's equity comes from two main sources: 1st
is the investment of the proprietor and 2nd is the
earnings of a business. In this chapter, we will
discuss the first source of owner's equity which is
from the proprietor's investment
BALANCE SHEET EQUATION
 The balance sheet equation is maintained continuously throughout the

operations of a business. To illustrate, let us assume the following:
On July 1, 2005, A. Alberto invested P5,000 cash in a typing services

business registered as Type-Fast Enterprises. A balance sheet prepared
immediately after the investment would appear thus.
USE OF ACCOUNTS
 It would not be practical to prepare a balance sheet after every

business activity as was done for Type-Fast Enterprises. Most
businesses have numerous transactions that require accounting
systems and procedures. One such procedure is to record all business
transactions in books of accounts. These entries are later classified
and summarized for the preparation of a balance sheet.
HEADING OF A BALANCE SHEET
 The illustrative balance sheets prepared for Type-Fast Enterprises

show a heading for every balance sheet, which contains the
following data:
1. Name of the business for which the balance sheet is prepared.

2. Name of the statement prepared balance sheet.
3. Date for which the balance sheet is prepared.
BALANCE SHEET CLASSIFICATIONS
 The balance sheets prepared for Type-Fast Enterprises are simple reports for which the accounts
are not classified. To make a balance sheet more meaningful to the statement user, the accounts
are properly classified. In the International Accounting Standard 1 Presentation of Financial
Statements approved for implementation January 1, 2005 under Balance Sheet, it is stated that an
entity shall present current and non-current liabilities as separate classifications in the face of its
balance sheer
Following this new standard, the accounts in the balance
sheet shall no longer appear as many varied accounts
but as far as possible be grouped into cash, receivables,
prepaid expenses, etc. or just current assets.
CURRENT ASSETS
 Current assets include cash and any other asset that is convertible into
cash or will be sold or consumed within one year or one operating
cycle, whichever is longer. The current assets are presented in the
order of liquidity Examples of current assets are cash, accounts
receivable, notes receivable, interest receivable, merchandise
inventory, and prepaid expenses.
Cash
 Cash includes coins, currencies, money orders,

bank drafts, checks, bank deposits, and other
cash items that are readily available for use in
operations. When they are on hand as in a cash
box or a safe deposit, they are referred to as cash
on hand
When they have been deposited in a savings or current
account in a bank and are to be used for operations, they
are referred to as cash in bank. However, it is an
accepted accounting practice to use the term "cash' to
refer to both cash on hand and in bank
Accounts Receivable
Accounts receivable are claims of the business against

clients or customers usually arising from services
rendered or from sales of goods Accounts receivable
are shown in the balance sheet at the amount expected
to be collected or at the net realizable value.
A provision is made for doubtful accounts or an amount that is not
expected to be collected. The accountant needs to make an estimate as
to how much of the total accounts receivable will become uncollectible.
This is in accordance with the accounting principle of conservatism.
Thus, in the balance sheet, accounts receivable are shown as follows:
Accounts Receivable P xxxxx
Less Allowance for Doubtful Accounts xxx
Net Realizable Value P xxxxx
Notes Receivable
When the business claims against clients or customers

for services or sales are evidenced by an unconditional
written promise to pay a certain amount on demand or
at a certain future time, they are referred to as notes
receivable.
Interest Receivable
A promissory note received from clients or customers may

be interest-bearing or non-interest bearing. The additional
charge of interest collected by the Business on interest-
bearing promissory notes is referred to as interest receivable
Merchandise Inventory
The term "merchandise" is used to refer to goods bought by

a retailer or a wholesaler for resale. Goods that remain
unsold at the end of the year are called merchandise
inventory
Prepaid Expenses
An expenditure for operations that is prepaid or paid

in advance is referred to as prepaid expense. Some
examples of prepaid expenses are prepaid insurance,
prepaid rent, prepaid supplies, and prepaid interest.
NON-CURRENT ASSETS
When an asset is not expected to be realized, not

intended for resale, restricted from being exchanged
or used to settle a liability within twelve months of
the balance sheet date, the asset is classified as non-
current
. Examples of non-current assets are:
Long-term investments refer to the acquisition of stocks, bonds, real

estate or other assets in order to produce added revenue to the business.
When these securities are held for the long-term, they are classified in
the balance sheet in a separate section as Long-Term Investments
a. Land Real estate owned by a business used in operations
such as land on which is
constructed an office building is referred to as land
b. Building, any building constructed or acquired for use
such as office building is referred to as building. Although
land and building may be physically located together, they
are accounted. for as two separate accounts in the balance
sheet.
c. Office Equipment The term office equipment is used
to refer to typewriters, cash registers, calculators,
computers, filing cabinets, and any other machine or
equipment used in the office.
d. Office Furniture. The term office furniture refers to tables,
chairs, counters, cabinets, and any other furniture items that are
used in the office.
e. Transportation Vehicle. This includes trucks, cars,
jeeps, motorcycles, motorbikes, bicycles, and any other
vehicle used for transportation purposes by the business.
All property items, except land, are subject to
depreciation. Depreciation is the allocation of the
cost of a property item over its useful life. The
amount of depreciation provided over a period of
time is referred to as accumulated depreciation
Intangible Assets
Assets that have no physical existence but which give the business long-
term rights as a result of which the business enjoys exclusive or
preferred positions in the market place are called tangible assets.
Some examples of intangible assets are copyrights, trademarks,
tradenames, patents, goodwill and lease rights.
Other Assets
Assets that cannot be properly classified into any of the above-

mentioned classifications of current assets, long-term
investments, property & equipment, and intangible assets are
grouped together in a section called other assets.
that do not usually have long term investments, intangible assets or other
assets
LIABILITIES SECTION
Liabilities are classified in the balance sheet into two main

sections: current liabilities and non-current liabilities.
CURRENT LIABILITIES
Debts or obligations of the business that are to be paid within one year
using current resources are classified as current liabilities. Examples are
accounts payable. notes payable, interest payable, other payables, and
unearned income.
Accounts Payable
A liability representing an amount owed to a creditor,

usually from the purchase of merchandise or materials
and supplies is referred to as accounts arising payable.
Notes Payable
A liability evidenced by a promissory note is

called note payable.
Interest Payable
The amount additionally due on a promissory note as interest

is called interest payable.
Other Payables
Other Payables Other obligations of the business

to pay for the costs of operations are called other
payables. Some examples of other payables are
accrued expenses such as for salaries and rent.
Deferred Income
 Payments for services or sales that are received in advance from

clients or customers are called deferred income.
NON-CURRENT LIABILITIES
 Debts or obligations of the business that are due and payable after one
year are classified as non-current liabilities. Also classified as non-
current liabilities are debts or obligations, which, although payable
within one year, will be paid from non-current resources Examples are
notes payable due after one year (long term notes payable) and
obligations evidenced by a mortgage of real estate usually due after
one year (mortgage payable)
OWNER'S EQUITY
The excess of assets over the liabilities of the business

represents owner's equity. The two principal elements
comprising owner's equity are the proprietor's
investment and the earnings of the business.
Owner's Capital
Owner's Capital The term owner's capital is

used to refer to the investment of the proprietor
in the business.
Owner's Drawing
 The term owner's drawing is used to refer to withdrawals by the

proprietor in anticipation of earnings in the business.
FORMS OF BALANCE SHEET
PRESENTATION
A balance sheet may be prepared in any of the three forms:

(1) account form
(2) report form
(3) financial position form.
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THE BALANCE SHEET

1. To understand the financial condition of a business presented in a

2. To develop the basic skills needed in preparing a balance sheet.

ASSETS LIABILITIES OWNER'S EQUITY

ASSETS OWNER'S EQUITY-LIABILITIES

 Assets are economic resources owned by a business, which will

Liabilities are debts or obligations of the business, which are

 Owner's equity is the residual claim of the owner in the assets of a

 The balance sheet equation is maintained continuously throughout the

On July 1, 2005, A. Alberto invested P5,000 cash in a typing services

 It would not be practical to prepare a balance sheet after every

 The illustrative balance sheets prepared for Type-Fast Enterprises

1. Name of the business for which the balance sheet is prepared.

 Cash includes coins, currencies, money orders,

Accounts receivable are claims of the business against

When the business claims against clients or customers

A promissory note received from clients or customers may

The term "merchandise" is used to refer to goods bought by

An expenditure for operations that is prepaid or paid

When an asset is not expected to be realized, not

Long-term investments refer to the acquisition of stocks, bonds, real

Assets that cannot be properly classified into any of the above-

Liabilities are classified in the balance sheet into two main

A liability representing an amount owed to a creditor,

A liability evidenced by a promissory note is

The amount additionally due on a promissory note as interest

Other Payables Other obligations of the business

 Payments for services or sales that are received in advance from

The excess of assets over the liabilities of the business

Owner's Capital The term owner's capital is

 The term owner's drawing is used to refer to withdrawals by the

A balance sheet may be prepared in any of the three forms:

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