Study: What is the standard format for a Balance Sheet?
|
Study the (8m:33s) video for this topic provided below:
|
Alternative Topic Formats: Audio File MP3 Download MP3 Transcript Files Transcript MS Word
Download Transcript MS Word, Transcript PDF
Download Transcript PDF |
Take the topic quiz, by clicking here or clicking the "Next" button at the bottom right of this page.
Score at least 4 out of 5 on the quiz before moving on. If you do not score at least 4 out of 5 on the quiz, restudy the material and try again.
I will keep your highest score.
The videos, images and transcripts below provide the same content as provided in Step #1 above. It has simply been broken down into smaller, bite-sized pieces for easier access and review.
Slides 1-2 (m:43s)
Links to an external site.
Welcome to Introduction to Accounting Preparing for a User's Perspective
What is the Standard Format for a Balance Sheet?
Balance Sheet Basics
You should already know that the Balance Sheet is based on the following “Balance Sheet equation”: Assets = Liabilities + Equity
You should also know that the balance sheet is prepared as of, or as at, a very specific point in time (such as 12/31/X1) just as if you had taken a financial photograph of the business’ resources (i.e. assets) and the external claims against the business for those resources by creditors (i.e. liabilities) and investors (i.e. equity).
Using what you already know, I hope to help you learn how to prepare a basic, comparative, classified Balance Sheet using a standard format.
Slide 3 (0m:43s)
Links to an external site.Another way of describing the Balance Sheet equation
Links to an external site. is to say that it shows, as of a point in time, what resources (i.e. assets) the business has and who or what has claims against those resources. The balance sheet's answer as to who claims the business' resources will always be its debt financiers (i.e. liabilities
Links to an external site.) and/or its equity financiers (equity
Links to an external site.).
A business' balance sheet "balances" when its assets are exactly equal to its liabilities + its equity. If a Balance Sheet does not balance, it is wrong. Before relying on a balance sheet to make a decision, you should strive to ensure that it balances.
Key Concept: All Balance Sheets must balance AS OF a given point in time.
Slide 4 (0m:41s) Links to an external site.Balance Sheet Format
Balance Sheets are usually prepared at least once a year at the end of the business’ fiscal year, often on December 31, but businesses are allowed to choose any other date that makes sense to them. Some businesses choose to have their year-end match the calendar year-end or the end of their business cycle. For example, Bank of America has a December 31 year-end whereas Apple's year-end is the last Saturday of September. When a business provides two or more year-end balances on the same balance sheet, the balance sheet is called a "Comparative Balance Sheet" because it allows users to "compare" the balances from one year (or period) to the next and recognize positive and negative trends.
Slides 5-6 (1m:19s)
Links to an external site.To help solidify the concept of a Balance Sheet, let’s create a simple one from scratch. For example, let’s assume that on February 23, X1 Kevin started a new surfboard rental business, Kevin Surf Company (KSC). To finance his start-up, Kevin contributed $3,000 of his own cash to become the 100% owner of the new business. Kevin then went to the local bank and borrowed another $2,000 that he promised to repay in one year along with 10% interest. On the same day, KSC took $1,000 of its cash and purchased 10 beginner soft-top boards for $100 each.
If, at the end of the day on February 23, KSC were to stop and take a financial photograph of the business it would need to answer the following questions.
| What assets does KSC have? | How did KSC finance those assets? | |||
| Cash | $4,000 | Liabilities | $2,000 | |
| Equipment - Surfboards | 1,000 | Equity | 3,000 | |
| Total Assets | $5,000 | Total Liabilities and Equity | $5,000 |
You should notice right away, that ALL of KSC’s $5,000 of assets were either funded by debt $2,000 or by equity $3,000; therefore, KSC’s Balance Sheet is in balance.
As of February 23, 20X1, KSC's Balance Sheet appears as follows:Kevin Surf Company
Balance Sheet
As of February 23, 20X1
|
Current Assets |
|
|
Current Liabilities |
|
|
|
Cash |
$1,000 |
|
Note payable |
$2,000 |
|
|
Total Current Assets |
$1,000 |
|
Total Liabilities |
$2,000 |
|
|
|
|
|
|
|
|
|
Long-Term Assets |
|
|
Stockholder’s Equity |
|
|
|
Equipment |
$4,000 |
|
Capital Contributions |
$3,000 |
|
|
Total Long-Term Assets |
$4,000 |
|
Total Stockholders’ Equity |
$3,000 |
|
|
Total Assets |
$5,000 |
|
Total Liabilities and Stockholder’s Equity |
$5,000 |
|
As you can see, KSC's Balance Sheet balances because its assets of $5,000 are equal to its liabilities and stockholder's equity. If you ever look at a Balance Sheet and you notice that it doesn't balance, you can be 100% positive that the balance sheet is wrong and you would be wise not to rely on it until it gets fixed. For this class, if you ever finish a homework assignment involving a Balance Sheet that doesn’t balance, please go back and fix it, then turn in the corrected one. You will be glad you did.
Slide 8 (0m:44s)
Links to an external site.For this course, you will be expected to know how to prepare a balance sheet, so please take the time to study and practice the standard balance sheet format noted above. Here are some key things to watch out for when preparing a balance sheet:
1) The Balance Sheet must be properly titled with:
a) the name of the business,
b) the name of the financial statement and
c) the specific (as of or as at) date that the Balance Sheet represents.
2) The Balance Sheet must balance
Which it does in this case. You should also notice that accountants use double-underlines to indicate final totals as can be seen under total assets Links to an external site. and total liabilities and equity. Single underlines indicate subtotals.
3) The Balance Sheet must be classified
Slide 9 (1m:08s)
Links to an external site.Let's talk about what it means for a Balance Sheet to be classified. In the United States, we prepare what are called "classified Balance Sheets". We have a whole topic later on in this course that focuses solely on describing in detail what classified balance sheets are; however, just to wet your appetite, here is a short introduction. A classified balance sheet classifies assets and liabilities by their liquidity. Liquidity effectively means "nearness to cash". For example, cash is the most liquid
Links to an external site.of assets because it is already cash. Therefore, in the United States, cash will always be listed as the first asset. Assets that are quickly and easily converted to cash, or will save the company from having to pay cash, within one year of the balance sheet date are called "Current Assets
Links to an external site.". Assets that will take longer than one year to be converted, or save cash, are called "Noncurrent Assets" or "Long-term Assets". For example, because businesses tend to hold land for many, many years, land is usually classified as a "Long-term Asset". On the other hand, because accounts receivable are usually converted to cash within one year, hopefully within 30 days, they are listed toward the top of the balance sheet under cash as a "Current Asset".
Slide 10 (0m:59s)
Links to an external site.Liabilities are also ordered from top-to-bottom based on the concept of liquidity but the classification focus for liabilities is on how quickly the business expects to need cash to pay off the noted liability. Liabilities that the business expects to pay off within one year are called "Current Liabilities" and will be listed at the top of the liabilities section of the balance sheet. Liabilities that the business expects to pay off over multiple years, such as a 30 year mortgage, will be listed under long-term Liabilities at the bottom of the Balance Sheet. In our example, our note payable is to be paid off within the next year so it is classified as a "Current Liability". By classifying assets and liabilities on the Balance Sheet in order of their liquidity, businesses are able to help external lenders and creditors better understand the business' current ability to pay off its short and long-term debts. Companies that are able to pay off their short-term debts are considered to be "liquid". Companies that are able to pay off their long-term debts are considered to be "solvent
Links to an external site.".
Slide 11 (0m:42s)
Links to an external site.As a reminder of what you have already learned in a prior module in which we defined common asset, liability and equity accounts, here is a list of the most common asset, liability and equity accounts that we will be using throughout this course.
|
Assets |
Liabilities (examples of Debt Financing) |
Equity (examples of Equity Financing) |
|
Cash |
Accounts payable |
Capital stock |
|
Accounts receivable |
Salaries and wages payable |
Retained Earnings |
|
Inventory |
Income taxes payable |
|
|
Office supplies |
Dividends payable |
|
|
Prepaid insurance |
Interest payable |
|
|
Prepaid rent |
Unearned sales revenue |
|
|
Notes receivable |
Utilities payable |
|
|
Warehouse equipment |
Notes payable |
|
|
Land |
Mortgages payable |
|
|
Patents |
Bonds payable |
|
|
Trademarks |
|
|
|
Copyrights |
|
|
|
Goodwill |
|
|
Please take the time now to review their names, their definitions, their account types (i.e. an asset, liability, or equity), and know how to compute their ending balances using a T-account
Links to an external site.. In the next topic, you will learn in more detail how to classify the balance sheet accounts in order of their liquidity. I am confident that if you will take the time now to review these account names, definitions, types, and computations, your ability to prepare, understand, and use Balance Sheets will improve significantly.
Slides 12-15 (1m:01s)
Links to an external site.In relation to these accounts, here are the questions that I recommend you keep in mind as you learn more about the language of accounting:
- For each asset account, ask yourself "Why is it an asset? What potential future benefit will it provide the business that would qualify it to be called an asset? What could cause this asset to be used up so that it is no longer an asset and should be expensed?
- For each liability account, ask yourself "Why is it a liability? What did external creditors and lenders give the company, or what happened, that allowed external creditors and lenders to have claim on the company's assets? What did the company do in the past that committed it to pay this amount off in the future? What will it have to sacrifice in the future to satisfy these claims?
- For each equity account, ask yourself "Why is it equity? How have the owners either contributed resources to the business or earned profits which they have retained in the business to justify their equity claims on the business' assets?"
Hopefully this has helped you learn more about the standard balance sheet format and that you will be able to use this understanding as you move throughout this course and in your career.