Balance Sheet (Word Scramble with Coaching)

The balance sheet presents a company’s financial position at a specific moment, such as the end of a day, month, quarter or year. It is like a snapshot that captures the asset, liability, and owner’s (stockholders’) equity account balances at that instant or point in time.

Example: A balance sheet dated December 31 will show the amounts in the asset, liability and equity accounts as of midnight on December 31, after all transactions for that date have been recorded.

Assets are economic resources owned by a company as a result of past transactions or events. They are expected to provide future economic benefits to the company.

Examples: Cash, accounts receivable, inventory, investments, land, buildings, and equipment are all examples of assets that would be reported on a company’s balance sheet.

Liabilities represent a company’s obligations or debts arising from past transactions that will be settled by the transfer of assets, the providing of services, or other economic activity in the future.

Example: Accounts payable, loans payable, salaries payable, interest payable, and customer deposits are all liabilities that require the company to pay cash or provide goods/services in the future.

When a company makes a sale on credit, allowing the customer to pay at a later date, it records an account receivable. Accounts receivable represents the amount customers owe the company for goods or services already provided.

Example: If ABC Company sells $1,000 of merchandise to a customer on credit, it debits Accounts Receivable for $1,000 and credits Sales Revenues for $1,000. The $1,000 accounts receivable reflects money the customer owes ABC from the sale.

Inventory refers to the goods a company owns and are available for sale to customers in the ordinary course of business. Merchandising and manufacturing companies report inventory as a current asset on their balance sheets.

Example: A clothing retailer’s inventory consists of all the unsold shirts, pants, dresses and clothing accessories it owns and likely has in its store and warehouses at the balance sheet date.

Accumulated depreciation is the cumulative amount of depreciation expense recorded for an asset from the time it was acquired until the balance sheet date. It is a contra-asset account that reduces the book value of the related asset.

Example: If a company buys a machine for $100,000 with a 5-year useful life and records $20,000 of depreciation each year, the accumulated depreciation balance at the end of 3 years will be $60,000. On the balance sheet, it would report the machine at its $100,000 cost and a negative $60,000 of accumulated depreciation, resulting in a book or carriying value of $40,000.

When a company purchases goods or services on credit, it records the unpaid bill as accounts payable. Accounts payable is a current liability that reports the amount owed to suppliers.

Example: If XYZ Company receives an invoice of $500 for office supplies purchased on account, it will credit Accounts Payable for $500 and debit Office Supplies Expense for $500. The Accounts Payable balance reports the total amount owed to suppliers.

In a corporation, stockholders’ (or shareholders’) equity represents the stockholders’ residual interest in the corporation’s assets after deducting the corporation’s liabilities. It consists of amounts the corporation received from issuing stock and the cumulative earnings the corporation has retained and has likely reinvested in the business.

Example: On the balance sheet, stockholders’ equity is usually divided into sections such as common stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, and a subtraction for treasury stock. The total of these amounts equals total stockholders’ equity.

Retained earnings represents the cumulative net income a corporation has earned minus the dividends declared since the corporation began. It is a significant component of stockholders’ equity.

Example: If a corporation has earned a total of $500,000 in net income since it started and has paid out $100,000 in dividends, its retained earnings balance would be $400,000. This amount is reported in the stockholders’ equity section of the balance sheet. The retained earnings are likely reinvested in assets and/or used to reduce its liabilities.

When a corporation buys back shares of its own stock but does not retire them, those shares are known as treasury stock. Treasury stock amount appears as a subtraction in the stockholders’ equity section of the balance sheet.

Example: Assume a corporation has 100,000 shares of common stock outstanding and repurchases 5,000 of those shares to hold as treasury stock. The corporation’s balance sheet will report the cost to repurchase the treasury stock as a negative amount in the stockholders’ equity section of the balance sheet.

Insurance premiums paid by a company before the policy period begins represent a prepaid expense. The unexpired portion of the prepaid insurance is reported in a current asset account such as Prepaid Insurance or Prepaid Expenses.

Example: On December 1, ABC Company pays $12,000 for a 1-year insurance policy that began on December 1. On December 31, ABC would report Prepaid Insurance of $11,000 on its balance sheet, since there are only 11 months of unexpired insurance premiums remaining.

To make small disbursements conveniently without writing a check, companies may keep a small amount of cash on hand in what is known as a petty cash fund. The petty cash custodian is responsible for distributing the cash and documenting the disbursements.

Example: If a company establishes a petty cash fund of $100, it would report Petty Cash of $100 as a current asset on its balance sheet. When cash in the fund gets low, the custodian requests a check to replenish the fund back to $100. At the time of the replenishment, the expenses associated with the disbursements are recorded.

Inventory is a current asset because it is expected to be sold and converted into cash within one year or the operating cycle, whichever is longer. Merchandising and manufacturing companies report inventory after accounts receivable in the current assets section of the balance sheet.

Example: As of December 31, a manufacturer has $325,000 of raw materials, $480,000 of work-in process, and $590,000 of finished goods on hand. The combined $1,395,000 of inventory would be reported as a current asset on the manufacturer’s balance sheet. The components usually appear in the notes to the financial statements.

Paid-in capital, also called contributed capital, represents the amount of cash and other assets received from shareholders in exchange for shares of the corporation’s capital stock. It is one of the two major components of stockholders’ equity. (The other is retained earnings).

Example: The paid-in capital section of a corporation’s balance sheet might contain line items such as Common Stock, Preferred Stock, and Additional Paid-in Capital. These accounts reflect the amounts received when shares were initially sold to investors.

When a corporation declares dividends to shareholders, the amount declared is subtracted from retained earnings. As a result, the balance in retained earning is reduced and the corporation’s total stockholders’ equity is reduced.

Example: If a corporation’s retained earnings is $700,000 and it declares a $100,000 cash dividend, retained earnings decreases to $600,000. The journal entry is a $100,000 debit to Retained Earnings and a $100,000 credit to Cash Dividends Payable.

Under U.S. GAAP, companies are required to report inventory at the lower of its cost or its net realizable value (NRV). NRV is the estimated selling price minus estimated costs to complete, sell, and ship the inventory.

Example: A company purchased inventory for $50,000. The current selling price of the inventory is $45,000 and it would cost an additional $3,000 to get it sold. Since the NRV of $42,000 ($45,000 - $3,000) is lower than the $50,000 cost, the company should report the inventory at $42,000 and report an $8,000 loss

When cash or other assets are restricted for a long-term purpose such as constructing a building, the amount cannot be used to meet short-term obligations. Therefore, any restricted cash earmarked for acquiring long-term assets is reported in the Investments section of the balance sheet, not in the current asset section.

Example: A company issues bonds and puts the $2 million proceeds into an escrow account that can only be used to construct a new factory. The $2 million of restricted cash would be reported as Restricted Cash in the non-current Investments section of the balance sheet.

An impairment occurs when the carrying value (book value) of a long-term asset exceeds its fair value and the decline is deemed to be permanent. This may require that the asset’s book value be written down and an impairment loss reported.

Example: A company has a building with a cost of $500,000 that has accumulated depreciation of $100,000, resulting in a carrying value of $400,000. Due to changes in the real estate market, the building’s fair value has declined to $250,000. Under certain conditions, the company would record an impairment loss of $150,000 and reduce the building’s carrying value to its $250,000 fair value.

Intangible assets lack physical substance but provide economic benefits to the company. They include items such as patents, copyrights, trademarks, trade names, and goodwill that were purchased. The intangible assets are reported at their cost as long-term assets on the balance sheet after the Property, Plant and Equipment section.

Example: If a company purchased a patent for $80,000 and a trademark for $25,000, it would report Patents of $80,000 and Trademarks of $25,000 in the Intangible Assets section of its balance sheet.

A contra asset is an asset account with a credit balance that offsets part of the debit balance of the related asset account. Contra asset accounts include the Allowance for Doubtful Accounts and Accumulated Depreciation. Sometimes the contra accounts are referred to as valuation accounts.

Example: A company has Accounts Receivable of $500,000 and Allowance for Doubtful Accounts of $20,000. On the balance sheet, the company would report Accounts Receivable of $500,000 less the $20,000 contra asset balance in Allowance for Doubtful Accounts, for a net receivable of $480,000.