Understanding Balance Sheet: Assets, Liabilities, and Equity |

School: University of Minnesota-Twin Cities - Course: ACCOUNTING 1 - Subject: Accounting

Accounting Notes ●Balance Sheet ○Reports major classes and amounts of assets, liabilities and shareholders' equity ●Assets- resource that is controlled by the entity and is probable to provide future economic benefit (cash flow) ●Recognized as an asses only if: ○Firm has acquired the right to its use as a result of past transactions ○Firm can measure the future benefit ●All assets provide future benefits but not all future benefits are recorded in the balance sheet B/S ●Asset Types ○Current Assets- Assets that a firm expects to turn into cash or to sell or to consume during the normal operating cycle (usually within one year) ■Cash- Currency, bank deposits, and investments with an original maturity within 90 days ■Marketable securities- Short-term investments that can be quickly sold to raise cash ■Accounts receivable,net- Amounts due to the company from customers arising from the sale of products and services on credit ("net" refers to uncollectible accounts) ■Inventory- Goods purchased or produced for sale to customers ■Prepaid expenses- Costs paid in advance for rent, insurance, advertising, or other services ●Investments- Long-term investments in other firm's securities ●Property, Plant & Equipment (PPE)- Tangible, used in operations such as buildings ●Intangible Assets- Items such as goodwill, patents, and franchises ●Historical cost is both objective and verifiable ●While resources expended for research and development reflect an economic assed they generally are expensed as incurred ●Insight- Pharmaceutical firms do not have assets reflecting the full amount of money that they have spent developing drugs ○These amounts, for the most part, have been expensed in the past and serve to reduce retained earnings ●Internally developed trademarks are also economic assets, but may not show up on the balance sheet. - The purchase of externally developed trademarks are treated as assets ●Liability-obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services ●Current liabilities- Obligations that a firm expects to pay or discharge during the normal course of operations (usually within one year) ○Accounts payable- Amounts owed to suppliers for goods and services purchased on credit ●Long Term debt- Borrowings that have a due date or maturities more than one year after the balance sheet date

●Other long-term liabilities- Obligations that are not considered as current liabilities or long term debt- deferred taxes, future employee benefits ●Contributed capital- funds invested by the shareholders for an ownership interest ○Common stock (par value) ○Additional paid-in capital ●Retained earnings ○Earnings which are not paid out as dividends and reinvested in the firm ●During the account period for each transaction: ○Collecting source documents ○Recording journal entry into accounts ○Posting to the ledger (T-account) ●At the end of the accounting period: ○Preparing the unadjusted trial balance ○Recording adjusting entries ○Preparing the adjusted trial balance ○Recording and posting closing entries, preparing the financial statements