Balance Sheet Accounts Current Assets Long Term Assets
Balance Sheet Accounts: Current Assets, Long-Term Assets
The Chart of Accounts for a business includes balance sheet accounts thattrack what the company owns — its assets. The two types of asset accounts arecurrent assets and long-term assets.The balance sheet accounts, and the financial report they make up, are so-called because they have to balance out. The value of the assets must be equalto the claims made against those assets. These claims are liabilities made bylenders and equity made by owners.
Current assets are the key assets that your business uses up during a 12-monthperiod and will likely not be there the next year. Current asset accountsinclude the following: * Cash in Checking: Any company’s primary account is the checking account used for operating activities. This is the account used to deposit revenues and pay expenses. * Cash in Savings: This account is used for surplus cash. Any cash for which there is no immediate plan is deposited in an interest-earning savings account so that it can earn interest. * Cash on Hand: This account is used to track any cash kept at retail stores or in the office. In retail stores, cash must be kept in registers in order to provide change to customers. In the office, petty cash is often kept for immediate cash needs that pop up from time to time. * Accounts Receivable: If you offer your products or services to customers on store credit, then you need this account to track the customers who buy on your dime.Accounts Receivable isn’t used to track purchases made on other types ofcredit cards because your business gets paid directly by banks, not customers,when other credit cards are used. * Inventory: This account tracks the products you have on hand to sell to your customers. The value of the assets in this account varies depending upon the way you decide to track the flow of inventory into and out of the business. * Prepaid Insurance: This account tracks insurance you pay in advance that’s credited as it’s used up each month.
Long-term assets are assets that you anticipate your business will use formore than 12 months. Some of the most common long-term assets include: * Land: This account tracks the land owned by the company. The value of the land is based on the cost of purchasing it. * Buildings: This account tracks the value of any buildings a business owns. The value of the building is based on the cost of purchasing it. The key difference between buildings and land is that the building’s value is depreciated, while the value of the land is not depreciated. * Accumulated Depreciation — Buildings: This account tracks the cumulative amount a building is depreciated over its useful lifespan. * Leasehold Improvements: This account tracks the value of improvements to buildings or other facilities that a business leases rather than purchases. Leasehold improvements are depreciated as the value of the asset ages. * Accumulated Depreciation — Leasehold Improvements: This account tracks the cumulative amount depreciated for leasehold improvements. * Vehicles: This account tracks any cars, trucks, or other vehicles owned by the business. The initial value of any vehicle is listed in this account based on the total cost paid to put the vehicle in service. Vehicles also depreciate through their useful lifespan. * Accumulated Depreciation — Vehicles: This account tracks the depreciation of all vehicles owned by the company. * Furniture and Fixtures: This account tracks any furniture or fixtures purchased for use in the business. The value of the furniture and fixtures in this account is based on the cost of purchasing these items. These items are depreciated during their useful lifespan. * Accumulated Depreciation — Furniture and Fixtures: This account tracks the accumulated depreciation of all furniture and fixtures. * Equipment: This account tracks equipment that was purchased for use for more than one year, such as computers, copiers, tools, and cash registers. Equipment is also depreciated to show that over time it gets used up and must be replaced. * Accumulated Depreciation — Equipment: This account tracks the accumulated depreciation of all the equipment.The following accounts track long-term assets such as organization costs,patents, and copyrights. These are called intangible assets, and the accountsthat track them include: * Organization Costs: This account tracks initial start-up expenses to get the business off the ground. Special licenses and legal fees must be written off over a number of years using a method similar to depreciation, called amortization, which is also tracked. * Amortization — Organization Costs: This account tracks the accumulated amortization of organization costs during the period in which they’re being written-off. * Patents: This account tracks the costs associated with patents, grants made by governments that guarantee to the inventor of a product or service the exclusive right to make, use, and sell that product or service over a set period of time. Patent costs are amortized. * Amortization — Patents: This account tracks the accumulated amortization of a business’s patents. * Copyrights: This account tracks the costs incurred to establish copyrights. This legal right expires after a set number of years, so its value is amortized as the copyright gets used up. * Goodwill: This account is only needed if a company buys another company for more than the actual value of its tangible assets. Goodwill reflects the intangible value of this purchase for things like company reputation, store locations, and customer base.Long-Term Assets Definition
Understanding Long-Term assets
Long-term assets are those held on a company’s balance sheet for many years.Long-term assets can include tangible assets, which are physical and alsointangible assets that cannot be touched such as a company’s trademark orpatent.There is no standardized accounting formula that identifies an asset as beinga long-term asset, but it is commonly assumed that such an asset must have auseful life of more than one year.Some examples of long-term assets include: * Fixed assets like property, plant, and equipment, which can include land, machinery, buildings, fixtures, and vehicles * Long-term investments such as stocks and bonds or real estate, or investments made in other companies. * Trademarks, client lists, patents * The goodwill acquired in a merger or acquisition, which is considered an intangible long-term assetChanges observed in long-term assets on a companies balance sheet can be asign of capital investment or liquidation. If a company is investing in itslong-term growth, it will use revenues to make more asset purchases designedto drive earnings in the long-run. However, investors must be aware that somecompanies will sell their long-term assets in order to raise cash to meetshort-term operational costs, or pay the debt, which can be a warning signthat a company is in financial difficulty.
How a Trial Balance Works
Preparing a trial balance for a company serves to detect any mathematicalerrors that have occurred in the double-entry accounting system. If the totaldebits equal the total credits, the trial balance is considered to bebalanced, and there should be no mathematical errors in the ledgers. However,this does not mean there are no errors in a company’s accounting system. Forexample, transactions classified improperly or those simply missing from thesystem could still be material accounting errors that would not be detected bythe trial balance procedure.
Overview: Balance sheet definition
A balance sheet is a statement that shows the assets, liabilities, and equityof a business at a particular time. The statement is designed to show exactlywhat a company owns, what it owes, and how much money has been invested intothe company by owners and investors.A balance sheet is not affected by adjusting journal entries or closingentries, nor does your balance sheet directly affect your net income and yourcash flow statement.* * *
The balance sheet formula
If you’re familiar with popular accounting terms, you know that all of yourgeneral ledger accounts need to be classified as one of the following: * Assets * Liabilities * Income * Expenses * Equity/CapitalWhile income and expense accounts are found on your income statement, thebalance sheet provides a summary of your business’ asset, liability, andequity accounts, providing the foundation for the balance sheet formula, whichyou remember is:Assets = Liabilities + EquityUnlike a cash flow statement or adjusted trial balance, the balance sheet isnot typically used to create a budget or manage business expenses, but isinstead designed to help business owners monitor assets, liabilities, andequity properly.* * *
Example of a balance sheet
Midway Services Balance Sheet 12/31/2020ASSETS | —|— Current Assets | Cash | $125,000 Accounts Receivable | $ 80,000 Inventory | $ 75,000 Total Current Assets | $280,000 Fixed Assets | Building | $300,000 Equipment | $100,000 Total Fixed Assets | $400,000 TOTAL ASSETS | $680,000 | LIABILITIES | Current Liabilities | Accounts Payable | $ 45,000 Interest Payable | $ 11,000 Taxes Payable | $ 15,000 Total Current Liabilities | $ 71,000 Long Term Liabilities | Notes Payable | $ 165,000 Total Long Term Liabilities | $236,000 TOTAL LIABILITIES | | OWNER’S EQUITY | Capital | $295,000 Retained Earnings | $149,000 TOTAL OWNER’S EQUITY | $444,000 | TOTAL LIABILITIES & OWNER’S EQUITY | $680,000 * * *
How to create balance sheets for your small business
The easiest, most accurate way to create a balance sheet is by usingaccounting software. However, you can still create a balance sheet even ifyou’re using a manual accounting system or spreadsheet software. Here are afew options:
Trial Balance Format
The trial balance format is easy to read because of its clean layout. Ittypically has four columns with the following descriptions: account number,name, debit balance, and credit balance. It’s always sorted by account number,so anyone can easily scan down the report to find an account balance. Thisorder also tends to be in balance sheet order since the average chart ofaccounts follows the accounting equation starting with the assets.Not all accounts in the chart of accounts are included on the TB, however.Usually only active accounts with year-end balance are included in the TBbecause accounts with zero balances don’t make it on the financial statements.For example, if a company had a vehicle at the beginning of the year and soldit before year-end, the vehicle account would not show up on the year-endreport because it’s not an active account.The report also totals the debit and credit columns at the bottom. As with allfinancial accounting, the debits must equal the credits. If it’s out ofbalance, something is wrong and the bookkeeper must go through each account tosee what got posted or recorded incorrectly.This step saves a lot time for accountants during the financial statementpreparation process because they don’t have to worry about the balance sheetand income statement being off due to an out-of-balance error. Keep in mind,this does not ensure that all journal entries were recorded accurately. Itjust means that the credits and debits balance.A journal entry error can still exist. For instance, in our vehicle saleexample the bookkeeper could have accidentally debited accounts receivableinstead of cash when the vehicle was sold. The debits would still equal thecredits, but the individual accounts are incorrect. This type of error canonly be found by going through the trial balance sheet account by account.Since most companies have computerized accounting systems, they rarelymanually create a TB or have to check for out-of-balance errors. They computersystem does that automatically.* * *
Importance of Balance Sheet:
Balance sheet analysis can say many things about a company’s achievement. Fewessential factors of the balance sheet are listed below: * Creditors, investors, and other stakeholders use this financial tool to know the financial status of a business. * It is used to analyse a company’s growth by comparing different years. * While applying for a business loan, a company has to submit a balance sheet to the bank. * Stakeholders can find out the business accomplishment and liquidity position of a company. * Company’s balance sheet analysis can detect business expansion and future expenses.Also Read: What is the difference between Fixed Assets and Current Assets?
Consolidation of Balance Sheet:
A consolidated balance sheet shows both the liabilities and assets of a parentcompany along with its subsidiaries in one document, without any specificmention about which item is associated with which company. A consolidatedfinancial statement is issued by a company whenever it acquires 50 per cent ofcontrolling stake or business in another company. For example: If anorganization has ₹1 million as assets and buy subsidiaries for ₹400,000 and₹300,000, assets respectively. In this scenario, the consolidated balancesheet will reflect ₹1.7 million as an asset.While recording the consolidated balance sheet, it’s essential to modify thesubsidiaries assets figures so that they indicate the accurate market value.Also, the parent company revenue should not be included in this sheet becausethe net change is ₹0.Do you know: What are Non-Current Assets?