Balance sheet +exercises

The accrual basis of accounting

• The accrual basis of accounting is the concept of recording revenues
when earned and expenses as incurred. The use of this approach
also impacts the balance sheet, where receivables or payables may be
recorded even in the absence of an associated cash receipt or cash
payment, respectively.
The basic accounting equation

Assets = Liabilities + Owners Equity

Balance sheet
• Another way to look at the balance sheet equation is that total assets
equals total liabilities plus owner's equity.
• Looking at the equation in this way shows how assets were financed:
either by borrowing money (liability) or by using the owner's money
(owner's or shareholders' equity).
• Balance sheets are usually presented with assets in one section and
liabilities and net worth (net assets/OE) in the other section with the
two sections "balancing".
Assets definition
• An asset is a resource with economic value that an individual,
corporation, or country owns or controls with the expectation
that it will provide a future benefit.

• They are bought or created to increase a firm's value or benefit

the firm's operations.
• An asset can be thought of as something that, in the future, can
generate cash flow, reduce expenses, or improve sales,
regardless of whether it's manufacturing equipment or a patent.
Assets
Non-current assets (Fixed assets)

• Property, plant and equipment

• Investment property, such as real estate held for investment
purposes
• Intangible assets
• Financial assets (excluding investments accounted for using
the equity method, accounts receivables, and cash and cash
equivalents), such as notes receivables
• Investments accounted for using the equity method
• Biological assets, which are living plants or animals. Bearer
biological assets are plants or animals which bear agricultural
produce for harvest, such as apple trees grown to produce
apples and sheep raised to produce wool.
Assets

• Intangible assets An intangible asset is an asset that lacks physical

substance (unlike physical assets such as machinery, software and
buildings) and usually is very hard to evaluate. It includes patents,
copyrights, franchises, goodwill, trademarks, trade names, the
general interpretation also includes software and other intangible
computer based assets. Contrary to other assets, they generally—
though not necessarily—suffer from typical market failures of non-
rivalry and non-excludability
Assets

• Investment generally results in acquiring an asset, also called an

investment. If the asset is available at a price worth investing, it is
normally expected either to generate income, or to appreciate in
value, so that it can be sold at a higher price (or both).
Current assets
1. Inventories
2. Accounts receivable
3. Cash and cash equivalents

• Prepaid expenses for future services that will be used within a year

• A Deferred expense or prepayment, prepaid expense, plural often prepaids, is an

asset representing cash paid out to a counterpart for goods or services to be
received in a later accounting period. For example, if a service contract is paid
quarterly in advance, at the end of the first month of the period two months remain
as a deferred expense. In the deferred expense the early payment is accompanied
by a related recognized expense in the subsequent accounting period, and the same
amount is deducted from the prepayment.
• Accounts receivable is a legally enforceable claim for payment held by a business
for goods supplied and/or services rendered that customers/clients have ordered
but not paid for.
Liability
• A liability is something a company owes, usually a sum of money.
Liabilities are settled over time through the transfer of economic
benefits including money, goods, or services.

• Liabilities can be contrasted with assets. Liabilities refer to things that

you owe or have borrowed; assets are things that you own or are
owed.
Liabilities
• Accounts payable
• Provisions for warranties or court decisions
(contingent liabilities that are both probable and
measurable)
• Financial liabilities (excluding provisions and accounts
payables), such as promissory notes and corporate bonds
• Liabilities and assets for current tax
• Deferred tax liabilities and deferred tax assets
• Unearned revenue for services paid for by customers
but not yet provided
• Accounts payable is money owed by a business to its
suppliers shown as a liability on a company's balance
sheet. It is distinct from notes payable liabilities, which
are debts created by formal legal instrument documents.
Liabilities

• In financial accounting, a provision is an account which records a

present liability of an entity (but not invoiced yet). The recording of
the liability in the entity's balance sheet is matched to an appropriate
expense account in the entity's income statement.

• Sometimes in IFRS, but not in GAAP, the term reserve is used instead
of provision. Such a use is, however, inconsistent with the
terminology suggested by International Accounting Standards Board
The term "reserve" can be a confusing accounting term
Equity / Capital
• The net assets shown by the balance sheet one of
three parts of the balance sheet, which is known as
the shareholders' equity. It comprises:

• Share capital
• Supplementary capital
• Previous years profit (loss)/retaied earnings
• Net profit (loss) of the current year
 -

• Records of the values of each account in the balance sheet are

maintained using a system of accounting known as double-entry
bookkeeping. In this sense, shareholders' equity by construction must
equal assets minus liabilities
Problem 1.2
• Classify each of the following as elements of the accounting equation
using the following abbreviations: A = Assets; L = Liabilities;
C = Capital
(a) Land
(b) Accounts Payable
(c) Owners’ Investment
(d) Accounts Receivable
Problem 1.1
• Given any two known elements, the third can easily be computed.
Determine the missing amount in each of the accounting equations
below.
Assets = Liabilities + Capital
(a) $7,200 = $2,800 + ?
(b) 7,000 = ? + $4,400
(c) ? = 2,000 + 4,400
(d) 20,000 = 5,600 + ?
Solution:
•
Assets = Liabilities + Capital
(a) $7,200 = $2,800 + $4,400
(b) 7,000 = 2,600 + $4,400
(c) 6,400 = 2,000 + 4,400
(d) 20,000 = 5,600 + 14,400
Exercise -4

The Accounting Equation

For the following four cases, use the accounting equation to compute the
missing quantity.
Assets Liabilities Owners’ Equity
Case A $10,000 $ 4,000 A
Case B 8,000 B $3,500
Case C C 5,500 7,000
Case D 13,000 15,000 D
Exercise -4 - solution
The Accounting Equation
For the following four cases, use the accounting equation to compute the missing quantity.
Assets Liabilities Owners’ Equity
Case A $10,000 $ 4,000 6,000
Case B 8,000 4,500 $3,500
Case C 12,500 5,500 7,000
Case D 13,000 15,000 - 2,000
Problem Dr.
3.2 Patrick Wallace began his practice, investing in
the business the following assets:

Prepare a balance sheet

Cash $12,000

Supplies 1,400

Equipment 22,600

Furniture 10,000
Solution

Solution: Assets Capital

Cash 12,000
Supplies 1,400
Equipment 22,600
Furniture 10,000

P. Wallace,
46,000
Capital
Problem 3.3
• If, in Solved Problem 3.2, Dr. Wallace owed a balance of $3,500 on the
equipment, what would the opening entry be?
solution
Solution: Assets Capital &Liabilities
Cash 12 000
Supplies 1 400

Equipment 22 600

Furniture 10 000
Accounts
3500
Payable

P. Wallace,
42500
Capital
Solved Problem 4.1
Indicate the name of the account group—Income
(I), Expense (E), Asset (A), Liability (L), or Capital (C)—in which each of the
following accounts belong.
(a) Accounts payable (g) Equipment
(b) Accounts receivable (h) Fees income
(c) Building (i) Interest expense
(d) Supplies ( j) Interest income
(e) Cash (k) Notes payable
(f) Drawing (l) Rent income
• Solution:
(a) L (b) A (c) A (d) A (e) A (f ) C (g) A (h) I (i) E ( j) I (k) L (l) I
 Exercise -11/czw

Total Assets
Using the following information, compute total assets, liabilities, owners’ equity
Equipment . . . . . . . . . . . . . . . $15,000
Accounts payable . . . . . . . . . . 1,800
Capital stock. . . . . . . . . . . . . . 2,800
Cash . . . . . . . . . . . . . . . . . . . 1,400
Loan payable . . . . . . . . . . . . . 13,000
Wages payable . . . . . . . . . . . . $ 900
Accounts receivable . . . . . . . . 3,000
Retained earnings . . . . . . . . . . 5,400
Inventory . . . . . . . . . . . . . . . . 4,500
Prepare a balance sheet.
Exercise -11 - solution
Total Assets
Using the following information, compute total assets. = 23 900
Equipment . . . . . . . . . . . . . . . $15,000
Accounts payable . . . . . . . . . . 1,800
Capital stock. . . . . . . . . . . . . . 2,800
Cash . . . . . . . . . . . . . . . . . . . 1,400
Loan payable . . . . . . . . . . . . . 13,000
Wages payable . . . . . . . . . . . . $ 900
Accounts receivable . . . . . . . . 3,000
Retained earnings . . . . . . . . . . 5,400
Inventory . . . . . . . . . . . . . . . . 4,500
Compute total liabilities. = 15700
Compute total owners’ equity = 8200
Prepare a balance sheet.
Exercise -5

Current Liabilities
Using the following information, compute total current liabilities, owners equity,
long-term liability.
Inventory . . . . . . . . . . . . . . . . . . . $9,000
Loan payable (due in 14 months) . . . . . . . . . . . . . . 1,100
Capital stock. . . . . . . . . . . . . . . . . 1,750
Cash . . . . . . . . . . . . . . . . . . . . . . 400
Mortgage payable (due in 30 years) . . . . . . . . . . . $10,000
Loan payable (due in 6 months) . . . 250
Accounts payable . . . . . . . . . . . . . 700
Retained earnings . . . . . . . . . . . . . 5,000
Exercise -5 - solution

Current Liabilities
Using the following information, compute total current liabilities, owners equity, long-term liability.
Inventory . . . . . . . . . . . . . . . . . . . $9,000
Loan payable (due in 14 months) . . . . . . . . . . . . . . 1,100
Capital stock. . . . . . . . . . . . . . . . . 1,750
Cash . . . . . . . . . . . . . . . . . . . . . . 400
Mortgage payable (due in 30 years) . . . . . . . . . . . . $10,000
Loan payable (due in 6 months) . . . 250
Accounts payable . . . . . . . . . . . . . 700
Retained earnings . . . . . . . . . . . . . 5,000