SMARTLY

ACCOUNTING FUNDAMENTALS

BALANCE SHEET BASICS

Introducing the Balance Sheet

All companies must follow a set of rules that standardizes the The three elements of a balance
reporting and recording of their financial data. sheet are assets, liabilities, and
equity.
While US companies follow Generally Accepted Accounting
Principles (GAAP), companies in most other countries follow the
International Financial Reporting Standards (IFRS).

The balance sheet gives a glimpse into the health and Balance sheet equation:
composition of a business.
assets = liabilities + equity
Double-entry bookkeeping: A transaction requires at least two This is also known as the
entries to keep the balance sheet balanced. accounting equation.
Dual-aspect concept: If there is a change in the total amount of
assets, there needs to be a resulting change in liabilities, equity,
or both.
Money-measurement concept: Only items expressed as Fair value: The reasonable
monetary amounts can go on a balance sheet. amount for which an item could
be sold in the marketplace.
Entity: A business, company, or organization.
Cost: The original amount paid
Entity concept: A business’ finances are separate from its for an item.
owner’s finances.
Going-concern concept: Accounting assumes that an entity will
operate indefinitely.

DACHSHUND’S DOUGHNUTS • BALANCE SHEET

AS OF 31 DEC 2016 (000’s omitted)
ASSETS LIABILITIES
Current Assets Current Liabilities
Cash $ 625 Accounts Payable $ 200
Accounts Receivable 175 Bank Loan Payable 25
Inventory 325 Estimated Tax Liability 10
Prepaid Expenses 5 Total Current Liabilities $ 235
Total Current Assets $ 1,130 Long-Term Liabilities
Noncurrent Assets Bank Loan Payable $ 840
Property, Plant and Equipment $ 1,250 Total Long-Term Liabilities $ 840
(Less Accumulated Depreciation) (330) EQUITY
Total Noncurrent Assets $ 920 Total Paid-In Capital $ 300
Retained Earnings 675
TOTAL ASSETS $ 2,050 TOTAL EQUITY $ 975
TOTAL LIABILITIES & EQUITY $ 2,050

©2018 Pedago, LLC. All rights reserved.

ACCOUNTING FUNDAMENTALS SMARTLY

Assets, Liabilities, and Equity

Assets: Items owned and controlled by an entity, valuable to the ASSETS

entity, and acquired at a measurable cost. Current Assets
Current assets are assets expected to be converted into cash or Cash $ 625
used up by the business within one year. Accounts Receivable 175
Inventory 325
Accounts Receivable: Where a company records credit Prepaid Expenses 5
purchases by its customers. The company expects these Total Current Assets $ 1,130
customers to pay them in cash in the near future.
Noncurrent Assets
Inventory: Goods an entity intends to sell. Property, Plant and Equip. $ 1,250
Prepaid Expenses: Monies paid in advance for pending (Less accum. depreciation) (330)
expenses—for example, paying rent in advance. Total Noncurrent Assets $ 920

Noncurrent assets will not be used up or converted into cash for TOTAL ASSETS $ 2,050
at least one year. For example:

Property, Plant and Equipment (PP&E): Tangible assets that

depreciate, or lose value, over time due to wear and tear.

Creditor: Anyone who lends money or extends credit. LIABILITIES

Current Liabilities
Liabilities: Debts owed to outside entities (creditors) in return for
borrowed goods, services, or monies. Accounts Payable $ 200
Bank Loan Payable 25
Current Liabilities: Obligations that will be paid within one year. Estimated Tax Liability 10
Long-Term Liabilities: Obligations that won’t be paid until at Total Current Liabilities $ 235
least a year has passed. Long-Term Liabilities
Bank Loan Payable $ 840
Bank Loans (Bank Loan Payable) can be recorded under both
current and long-term liabilities. Total Long-Term Liabilities $ 840
EQUITY
Accounts Payable: Obligatory monies owed by an entity for Total Paid-In Capital $ 300
goods and services. The opposite of Accounts Receivable.
Retained Earnings 675
Estimated Tax Liability: The estimated amount of what will be TOTAL EQUITY $ 975
due in taxes per year. TOTAL LIABILITIES & EQUITY $ 2,050
Equity: Money (capital) either supplied by equity investors or
collected in the form of an entity’s retained earnings.

Paid-In Capital: Money supplied by investors.

Retained Earnings: Income generated by an entity’s successful
operations that is reinvested in the entity.

Proprietorship: An entity with one sole owner and investor.

©2018 Pedago, LLC. All rights reserved.