Ch. 1 Types of Business and Financial Statements
1.5 Financial Statements: Balance Sheet
Learning Objectives
After finishing this section, students will be able to:
- Prepare a balance sheet.
Businesses have balance sheets but so does every individual. Every person can figure out their personal net worth by using the accounting equation.
Assets = Liabilities + Equity
Let’s practice your personal balance sheet first. On a sheet of paper, use three columns to create your own accounting equation. In the first column, list all of the things you own (assets). In the second column, list any amounts owed (liabilities). In the third column, using the accounting equation, calculate, you guessed it, the net amount of the asset (equity). When finished, total the columns to determine your net worth. Hint: The difference between the two columns is your equity or net worth.
Balance Sheet
Once the statement of stockholders’ equity is completed, accountants typically complete the balance sheet, a statement that lists what the organization owns (assets), what it owes (liabilities), and what it is worth (equity) on a specific date. Notice the change in timing of the report. The income statement and statement of owner’s equity report the financial performance and equity change for a period of time. The balance sheet, however, lists the financial position at the close of business on a specific date.
Let’s create a balance sheet for Cheesy Chuck’s for June 30. To begin, we look at the accounting records and determine what assets the business owns and the value of each. Cheesy Chuck’s has two assets: Cash ($6,200) and Equipment ($12,500). Adding the amount of assets gives a total asset value of $18,700.
Next, we determine the amount of money that Cheesy Chuck’s owes (liabilities). There are also three liabilities for Cheesy Chuck’s. The first account listed in the records is Accounts Payable for $650. Accounts Payable is the amount that Cheesy Chuck’s must pay in the future to vendors (also called suppliers) for the ingredients to make the gourmet popcorn. The second liability is Wages Payable for $1,200. This is the amount that Cheesy Chuck’s must pay in the future to employees for work that has been performed. The third liability is Income Tax Payable for $1,218. This is the amount that Cheesy Chuck’s must pay to the taxing agencies. Adding the three amounts gives us total liabilities of $1,850.
Finally, we bring the ending totals from the statement of stockholders’ equity to finish out the stockholders’ equity section of the balance sheet. Common stock is $12,500. Retained earnings is $3,132. Adding the two amounts give us total stockholders equity of $15,632.
| Cheesy Chuck’s Classic Corn | ||
| Balance Sheet | ||
| as of June 30, 20X8 | ||
| Assets | ||
|---|---|---|
| Cash | $6,200 | |
| Equipment | 12,500 | |
| Total Assets
|
$18,700
|
|
| Liabilities and Stockholders’ Equity | ||
| Liabilities | ||
| Accounts Payable | $650 | |
| Wages Payable | 1,200 | |
| Income Tax Payable | 1,218 | |
| Total Liabilities | 3,068 | |
| Stockholders’ Equity | ||
| Common Stock | 12,500 | |
| Retained Earnings | 3,132 | |
| Total Stockholders’ Equity | 15,632 | |
| Total Liabilities and Stockholder’s Equity | $18.700 | |
Common Stock of $12,500, Retained Earnings of $3,132, and Total Stockholders’ Equity of $15,632 came from the previous section.
Note: Colors are used to aid in learning and should not be used on real-life financial statements.
1.5a Example
| Account | Amount |
|---|---|
| Accounts Payable | 20,000 |
| Accounts Receivable | 16,000 |
| Accumulated Depreciation | 500 |
| Cash | 99,600 |
| Cost of Goods Sold | 12,000 |
| Common Stock | 100,000 |
| Depreciation Expense | 500 |
| Dividends | 1,500 |
| Dividends Payable | 1,500 |
| Insurance Expense | 200 |
| Interest Expense | 250 |
| Interest Payable | 250 |
| Inventory | 23,000 |
| Notes Payable | 30,000 |
| Office Equipment | 8,000 |
| Prepaid Insurance | 2,200 |
| Prepaid Rent | 2,000 |
| Rent Expense | 2,000 |
| Salary Expense | 6,000 |
| Sales | 22,000 |
| Utility Expense | 1,000 |
1.5a Practice
Using the Statement of Stockholder’s Equity from 1.4a Practice, create a Balance Sheet using the following accounts for Rachel’s Clothing Company for November 20X6.
| Accounts Payable | 59,030 |
| Accounts Receivable | 112,520 |
| Accumulated Depreciation (contra asset, needs to be subtracted from assets) | -40,200 |
| Allowance for Doubtful Accounts (contra asset, needs to be subtracted from assets) | -8,750 |
| Bad Debt Expense | 14,810 |
| Beginning Retained Earnings | 38,852 |
| Cash | 20,320 |
| Common Stock | 53,500 |
| Cost of Goods Sold | 180,292 |
| Dividends | 12,000 |
| Income Tax Expense (calculated at federal tax rate of 21% and at state tax rate of 4%) | 16,572 |
| Income Tax Payable | 16,572 |
| Interest Expense | 30,000 |
| Interest Payable | 3,010 |
| Interest Receivable | 990 |
| Interest Revenue | 5,890 |
| Inventory | 164,010 |
| Land | 53,000 |
| Notes Payable | 123,470 |
| Notes Receivable | 16,320 |
| Office Equipment | 76,060 |
| Operating Expenses | 91,110 |
| Prepaid Rent | 13,510 |
| Rent Expense | 4,910 |
| Salaries expense | 122,090 |
| Salaries Payable | 12,890 |
| Sales Revenue | 503,610 |
| Unearned Revenue | 62,740 |
Check Figures:
- Total Assets, $407,780
- Solution (Excel file will download)
1.5a Homework
The following accounts for Elm Connections as of December 31, 20X9.
| Account | Amount |
|---|---|
| Accounts Payable | 502,690 |
| Accounts Receivable | 34,672 |
| Accumulated Depreciation (contra asset, needs to be subtracted from assets) | -500 |
| Advertising Expense | 37,517 |
| Buildings | 350,000 |
| Cash | 597,323 |
| Common Stock | 432,975 |
| Cost of Goods Sold | 175,630 |
| Depreciation Expense | 500 |
| Dividends | 5,000 |
| Income Tax Expense (calculated at federal tax rate of 21%) | 66,095 |
| Income Tax Payable | 66,095 |
| Inventory | 263,909 |
| Office Supplies Expense | 9,008 |
| Rent Expense | 15,485 |
| Revenue | 578,059 |
| Sales Salaries Expense | 25,180 |
Instructions:
- Using the Statement of Stockholders Equity, created in 1.4a Homework, prepare a Balance Sheet for the year ended December 31, 20X9.
Licensing and Attribution:
Content on this page is adapted from the following openly licensed resource(s):
Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
