Cash Balance Sheet

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					Chapter 6 Balance Sheet

Learning Objectives
1. Explain the nature and purpose of balance sheet
2. Prepare a classified balance sheet

1. The purpose of balance sheet

A balance sheet is a snapshot of a business’ financial condition at a specific moment in time, us ually at the close
of an accounting period. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets
and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money
market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. An asset is
anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of
the business.

A balance sheet helps a small business owner quickly get a handle on the financial strength and capabilities of
the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs
and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?

Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Is the
receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectible? Has
the business been slowing down payables to forestall an inevitable cash shortage?

2. Classification of the statement

2.1 Title section
(a) Name of owner       As with the profit and loss statement, a balance sheet must show the name of the owner
and, where applicable, the business name.
(b) Date of report    A balance sheet is prepared at a particular time rather than over a period of time as in the
case of a profit and loss statement. For this reason, it is important to include the words 'as at' before the
appropriate date, which also must be shown on the report.

2.2 Assets section
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for
obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery,
are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.

(a) Current assets
Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current
assets would be checking or money market accounts, accounts receivable, and notes receivable that are due
within one year’ time.

    Cash
     Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
    Accounts receivables
     This is money owed to the business for purchases made by customers, suppliers, and other vendors.
    Notes receivables
     Notes receivables that are due within one year are current assets. Notes that cannot be collected on within
     one year should be considered long-term assets.

(b) Non-current assets—these are assets which normally assist in generating revenue for the
business. The benefits from these assets usually extend over several accounting periods. Non-
current assets fall into three main categories:

• Fixed These are normally non-current assets of a physical nature.

    Land
     Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered
     an asset that never wears out.
    Buildings
     Buildings are categorized as fixed assets and are depreciated over time.
    Office equipment
     This includes office equipment such as copiers, fax machines, printers, and computers used in your
    Machinery
     This figure represents machines and equipment used in your plant to produce your product. Examples of
     machinery might include lathes, conveyor belts, or a printing press.
    Vehicles
     This would include any vehicles used in your business.
    Total fixed assets
     This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.

•   Intangible      These are normally non-current assets of a non-physical nature, for example, a
     franchise (a right to trade in a certain area) or goodwill (in simple terms, the value placed on
     the good trading name of a business).
• Investments This section includes such items as investments in shares, long-term loans made to
     persons and organizations, long-term deposits in banks and other financial institutions.
    Total assets
     This figure represents the total dollar value of both the short-term and long-term assets of your business.

2.3 Liabilities section
This comprises the following amounts owed by the business to outside parties:
(a) Current liabilities—these include all liabilities which are due and payable within 12 months.
      Examples include creditors, bank overdrafts and sales tax payable.
    Accounts payable
     This is comprised of all short-term obligations owed by your business to creditors, suppliers, and other
     vendors. Accounts payable can include supplies and materials acquired on credit.
    Notes payable
     This represents money owed on a short-term collection cycle of one year or less. It may include bank notes,
     mortgage obligations, or vehicle payments.
    Accrued payroll and withholding
     This includes any earned wages or withholdings that are owed to or for employees but have not yet been
    Total current liabilities
     This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time

(b) Deferred liabilities—these are liabilities which are not due and payable within a 12-month
period. Examples include mortgages and long-term loans.

    Long-term liabilities
     These are any debts or obligations owed by the business that are due more than one year out from the
     current date.
    Mortgage note payable
     This is the balance of a mortgage that extends out beyond the current year. For example, you may have paid
     off three years of a fifteen-year mortgage note, of which the remaining eleven years, not counting the
     current year, are considered long-term.

2.4 Owners' equity
Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up of the initial investment in the
business as well as any retained earnings that are reinvested in the business.

    Common stock
     This is stock issued as part of the initial or later-stage investment in the business.
    Retained earnings
     These are earnings reinvested in the business after the deduction of any distributions to shareholders, such
     as dividend payments.

Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the

remaining monies that are owed to shareholders, including retained earnings reinvested in the business. 3.

Sample balance sheet

                                                 Example Company
                                                   Balance Sheet
                                                 December 31, 2005

ASSETS                                         LIABILITIES
Current Assets                                 Current Liabilities
Cash                                   $ 2,100 Notes Payable                                           $ 5,000
Petty Cash                                 100 Accounts Payable                                         35,900
Temporary Investments                   10,000 Wages Payable                                             8,500
Accounts Receivable -
                                        40,500 Interest Payable                                           2,900
Inventory                               31,000   Taxes Payable                                            6,100
Supplies                                 3,800   Warranty Liability                                       1,100
Prepaid Insurance                        1,500   Unearned Revenues                                        1,500
Total Current Assets                    89,000   Total Current Liabilities                               61,000
Investments                             36,000 Long-term Liabilities
                                                Notes Payable                                            20,000
Property, Plant & Equipment                     Bonds Payable                                           400,000
Land                                     5,500 Total Long-term Liabilities                              420,000
Land Improvements                        6,500
Buildings                              180,000
Equipment                              201,000 Total Liabilities                                        481,000
Less: Accum Depreciation               (56,000)
Prop, Plant & Equip - net              337,000
Intangible Assets                                      STOCKHOLDERS' EQUITY
Goodwill                               105,000         Common Stock                                     110,000
Trade Names                            200,000         Retained Earnings                                229,000
Total Intangible Assets                305,000         Less: Treasury Stock                             (50,000)
                                                       Total Stockholders' Equity                       289,000
Other Assets                             3,000
                                                 Total Liabilities & Stockholders'
Total Assets                     $770,000                                                             $770,000
The notes to the sample balance sheet have been omitted.

Description: This is an example of cash balance sheet. This document is useful in conducting cash balance sheet.