Balance Sheet Dimasaka & Jaranilla

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Basic Accounting Concepts: The Balance Sheet


Basic Concepts 1. Money Money Measur Measureme ements nts 2. Entit tity 3. Goin Going g Con Conce cerrn 4. Cost 5. Dual Dual Aspe Aspect ct 6. Accou Accounti nting ng Perio erio !. Cons Conser er"a "ati tion on #. $eali eali%a %ati tion on &. Matc Matc'i 'ing ng 1(.Consistency Consistency 11.Materiality Materiality


 )'e Money Measurement Measurement Concept A *usiness o+ns,   Ca Cas'


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 )'e Money Measurement Measurement Concept A *usiness o+ns,   Ca Cas'


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6 units 5(((( s. t  -3(((( 6((( l*s

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 )'e Entity Concept Entity  is any organi%ation or acti"ity or +'ic' accounting reports are prepare. E7ample 1, A *usiness o+ner ta0es -1(( rom t'e cas' register, t'e person is negligi*l negligi*le e ••  )'e e8ect to t'e Due to entity concept t'e accounting recors s'o+ t'at t'e *usiness 'as less cas'


 )'e Entity Concept E7ample 2, $etail store, • 9n la+ an unincorporate *usiness 'as no istinction *et+een t'e resources o t'e store :*usiness; an

t'e o+ner • 9n accounting resources are istinct an separate rom t'e *usiness an t'at o t'e o+ner


 )'e Entity Concept <or a corporation t'e istinction is oten uite easily mae. A corporation is a legal entity separate rom t'e persons +'o o+n it an t'e accounts o many corporations correspon e7actly to t'e scope o t'e legal entity.


 )'e Going Concern Concern Concept Concept Accounting assumes t'at an entity is a going concern  t'at it +ill continue to operate oruture an ine=nitely longis perio in t'e unless t'ere goo e"ience to t'e contrary. 9t is assume t'at t'eto resources currently a"aila*le t'e entity +ill *e use in its uture operations.


 )'e Going Concern Concern Concept Concept 9t pro"ies a more realistic "alue o *usiness assets. 9t allo+s =7e assets to *e +ritten o8 proportionally proportio nally o"er t'eir useul lie.


 )'e Going Concern Concern Concept Concept E7ample, At any gi"en moment a >eans manuacturer 'as  >eans in "arious stages o t'e prouction process. 9 t'e *usiness +ere liuiate toay t'ese partially complete >eans +oul 'a"e little i any "alue. Accounting assumes t'at t'e manuacturing process +ill *e carrie t'roug' to completion an t'ereor t'ereore e t'at t'e amount or +'ic' t'e partially complete  >eans coul *e sol i t'e company +ere liuiate toay is irrele"ant. irrele"ant.


 )'e Cost Concept Assets  economic resources o an entity.  )'ey consist o, 1. ?onmonetary assets  lan *uilings mac'ineries an ot'ers +'ose cas' "alue is not =7e *y contract 2. Monetary assets  money mar0eta*le securities an an ot'ers +'ose cas' "alue is =7e *y contract


 )'e Cost Concept An asset is orinarily entere initially in t'e accounting recors at t'e price pai to acuire it  at its cost. 9n t'e case o nonmonetary nonmonetary assets t'e cost concept e7tens to t'eir accounting su*seuent to ac[email protected] cost continues to *e t'e *asis or all su*seuent accounting or t'e asset


 )'e Cost Concept 'ile in monetary assets t'ey are accounte or at t'eir air "alue su*seuent to acuisition. <air "alue iis s t'e amount at +'ic' an asset coul *e e7 e7c'ange c'ange in a current transaction *et+een +illing parties ot'er t'an in a orce or liuiation sale. Goo+ill represents t'e "alue o t'e name reputation clientele etc o t'e purc'ase company.


E7amples ?onmonetary asset, -25(((( cost o a lan +ill *e recore as -25(((( as its 'istorical cost e"en i ater 2 years you can sell it at a "alue o -2!5(((. Monetary Asset,  ou   ou 'a"e an in"estment in" estment o 1((((( s'ares o t'e common stoc0. )o etermine t'e air "alue you nee to +ait or E to close an reer to t'e stoc0 price reporting ser"ices.


 )'e DualAspect DualAspect Concept  )erms,  )erms,  Asset     economic resources o an entity Equities claims o "arious parties against t'ese assets Liabilities  claims o creitors Owner’s equity  claims o t'e o+ner on t'e *usiness Transaction  e"ents t'at a8ect t'e num*ers in an entitys accounting recors


 )'e DualAspect DualAspect Concept <unamental accounting euation, Assets F Euities Assets F ia*ilities / +ners Euity E"ery transaction 'as a ual impact on t'e accounting recors. Accounting systems are set up so as to recor *ot' o t'ese aspects o a transaction.


E7ample uppose you start a *usiness an your =rst act is to open a *an0 account in +'ic' you eposite -4(((( rom your o+n money.  )'e ual aspect o t'is transaction transac tion is t'at t'e *usiness no+ 'as an asset cas' o -4(((( an you t'e o+ner 'as a claim also o -4(((( against t'is asset. Assets :cas'; -4(((( F Euities :o+ners; -4((((


As its ne7t transaction t'e *usiness *orro+e -15((( rom a *an0 t'e *usiness accounting recor recors s +oul c'ange in t+o +ays, Cas'  )otal  ) otal assets


+e to *an0



+ners euity )otal euities

4(((( -55(((


 )'e Balance 'eet Balance s'eet  a =nancial position o an accounting entity as o a speci=e moment in time. 9ts more ormal name is a statement o =nancial position. )'e *alance s'eet is snaps'ot o an instant in time it is a status report rat'er t'an a o+ report.


 )'e Balance 'eet


 )'e Balance 'eet De=nition o )erms 1. Assets Assets economic economic resou resourrces t'at t'at are are controlle *y an an cost :or air "alue; at entity t'e time o+'ose acuisition coul *e o*>ecti"ely measure. Cas' an ot'er assets t'at are e7pecte to *e reali%e in cas' or consume uring t'e normal operating cycle o t'e entity or +it'in one year are calle current assets


Balance 'eet • Cas'  consists o uns t'at are reaily a"aila*le or is*ursement

Mar0eta*le securitiesin"estments • Mar0eta*le t'at are *ot' reaily mar0eta*le an e7pecte to *e con"erte into cas' +it'in a year. E7. Ban0ers acceptance treasury *ills


Balance 'eet • Accounts recei"a*le amounts o+e to t'e entity *y its customers. Amounts o+e to t'e entity *y parties ot'er t'an customers +oul appear uner t'e 'eaing notes recei"a*le or ot'er recei"a*les. • 9n"entories  aggregate o items t'at are

eit'er 'elinor in t'eoorinary course *usiness t'esale process prouction or o suc' sale or soon to *e consume in t'e prouction o goos t'at +ill *e a"aila*le or sale.


Balance 'eet • Prepai Prepai e7penses  represent certain assets usually o an intangi*le nature +'ose useulness +ill e7pire in t'e near uture. E7ample is an insurance policy • Property Plant an Euipment  consists o assets t'at are tangi*le an relati"ely longli"e. )'ey are calle =7e assets.


Balance 'eet • 9n"estments securities o one company o+ne *y anot'er eit'er in orer to control t'e ot'er company or in anticipation anticipati on o earning a longterm l ongterm return return rom t'e in"estment. 9n"estments are noncurrent noncurr ent assets ass ets • 9ntangi*le assets  inclue goo+ill patents copyrig'ts ranc'ises an similar "alua*le *ut nonp'ysical t'ings controlle

*y t'e *usiness.


Balance 'eet 2. ia*ilities  o*ligations to transer asstes or pro"ie ser"ices to outsie parties arising rom e"ents t'at 'a"e alreay 'appene. ia*ilities t'at are e7pecte to *e satis=e or e7tingui e7tinguis'e s'e uring t'e normal operating cycle or +it'in one year are calle current lia*ilities.


Balance 'eet • Accounts paya*le  claims o suppliers arising rom t'eir urnis'ing goos or ser"ices t'e entity oruc' +'ic'suppliers t'ey 'a"e notto yet *een pai. are oten calle "enors. Amounts o+e to =nancial institutions are calle notes or s'ortterm loans. •  )  )a7 a7es es paya*le  amount t'at t'e entity o+es go"ernment agencies or ta7es.


Balance 'eet • Accrue e7penses  amounts earne earne *y outsie parties *ut 'a"e not yet

*een pai *y t'e entity. • Deerre :unearne; re"enues  represent repr esent t'e lia*ility t'at arises *ecause t'e entity 'as recei"e a"ance payment or a ser"ice it 'as agree to rener in t'e uture.


Balance 'eet • Current Current portion o longterm e*t  part o a longterm e*t t'at is ue

+it'in t'e ne7t 12 mont's. • t'er lia*ilities  o*ligations t'at o not meet t'e criteria or *eing classi=e as current current lia*ilities. ometimes calle noncurr noncurrent ent lia*ilities or longterm e*t


Balance 'eet • +ners euity  s'o+s t'e amount t'e o+ners 'a"e in"es in"este te in t'e entity entity.. 9n a corporation t'e o+ners'ip interest is e"ience *y s'ares o stoc0 an t'e o+ners euity section o t'e *alance s'eet is calle a s'are'olers euity or stoc0'olers euity. euity. 9t is also calle net assets *ecause t'e amount s'o+n or o+ners euity is eual to assets net o :minus; lia*ilities. )'e <AB e=nes it as t'e resiual interest interest in t'e assets o an entity

t'at remains ater eucting its lia*ilities.


Balance 'eet 2 Categories of shareholder’s equity: 1. Paiin capital or contri*ute capital 

amount t'e o+ners 'a"e in"este irectly int 'e *usiness *y purc'asing s'ares o stoc0 as t'ese t'ese s'ares +ere issue *y t'e corporation. P aiin capital in most corporations is su*i"ie into capital stoc0 an aitional paiin capital.


Balance 'eet Garsen Corporation 'as outstaning 1 million s'ares o common stoc0 +it' a par "alue o -1 per s'are. 9n"estors actually pai intos'ares. t'e corporation -5 million or t'ese Paiin capital, comm co mmon on st stoc oc0 0a att par par -1( -1((( ((( ((( ((.( .(( ( a it itio iona nall pai paii in n capi capita tall -4( -4(( (((( ((((. (.(( (( totall paiin tota paiin capital capital -5((( -5(((((( (((.(( .((


Balance 'eet 2. $etaine Earnings  i8erence *et+een t'e total earnings o t'e entity from its inception to date an t'e total amount o i"iens pai out to its s'are'olers oer its entire life! 9 t'e i8erence is negati"e t'e item is calle e=cit.


Balance 'eet "nincorporated #usinesses Di8erent terminology is use in t'e o+ners

section. • euity 9n a proprietors'ip a *usiness o+ne *y one person t'e o+ners euity is customarily s'o+n as a single num*er suc' as Hee Iones CapitalJ • 9n a partners'ip a *usiness o+ne >ointly *y se"eral persons t'ere is a capital account or eac' partner. partner.


Balance 'eet E7ample,  Iane Da"is capital -!5432 ayne mit' capital -!5432  )otal  ) otal partners capital - 15(#64


Balance 'eet A proprietors'ip or partners'ip *alance s'eet also may s'o+ a reconciliation reconciliation o t'e *eginning an ening *alance in eac' o+ners capital account.


Balance 'eet E7ample, ee Iones capital as o Ian 1 2((6 -1#(((( A, 2((6 earnings 45((( Deuct, 2((6 ra+ings :4((((; ee Iones capital as o Dec 31 2((6 -1#5(((


Balance 'eet  )'e unamental accounting euation can *e e7pane into, Assets F ia*ilities / paiin capital / retaine earnings


Balance 'eet Current ratio  t'e ratio o curr Current current ent assets to curr current ent lia*ilities. A curr current ent ratio o at least 2 to 1 is *elie"e to *e esira*le in a typical manuacturing company. Garsen company 'as current assets o -22651(!2 an current lia*ilities o -&11&(#&. )'e curr current ent ratio is 2.5 to 1 +'ic' is satisactory


Balance 'eet C'anges Alt'oug' in practice a *alance s'eet is prepare prepar e only at prescri*e inter"als in learning t'e accounting process it is useul to consier t'e c'anges one *y one.


Balance 'eet C'anges riiginal r inal Capi Capittal Con Contri*u ri*uti tion on Ian Ian. 1 Io'n Io'n mit mit' st start arts an an incorporate CD an tape store calle Music Mart 9nc. Ke oes t'is *y epositing -25((( o 'is o+n uns in a *an0 account t'at 'e 'as opene in t'e name o t'e *usiness entity an ta0ing -25((( o stoc0 certi=cates in return. Ke is t'e sole o+ner o t'e corporation. )'e *alance s'eet o Music Mart 9nc. +ill *e,   Music Mart Balance 'eet As o Ianuary 1 Assets Ass ets ia*ilit ia*ilities ies an +ners +ners Euity

Cas' -25(((

Paiin capital



Balance 'eet C'anges Ban0 Ba n0 oa oan n Ia Ian n 2 Mu Musi sic cM Mar artt * *or orrro+ o+s s-12 125 5(( (( r rom om a * *an [email protected] [email protected] t'e loan is e"ience *y a legal ocument calle a note. )'is transaction increases t'e asset cas' an t'e *usiness incurs a lia*ility to t'e *an0 calle notes paya*le. )'e *alance s'eet +ill *e, Music Mart Balance s'eet As o Ian 2 Cas'  )otal  ) otal


ia*ilities an +ners Euity -3!5(( ?otes paya*le -125((   Paiin capital 25 ((( -3!5(( )otal -3!5((


Balance 'eet C'anges Pur urc' c'as ase e o M Mer erc' c'an ani ise se Ia Ian n 3 )' )'e e *u *usi sine ness ss * *uy uys s in in"e "ent ntor ory y :merc'anise it intens to sell; in t'e amount o -5((( paying cas'. )'is transacton ecreases cas' an increass anot'er asset in"entory in"entory.. )'e *alance s'eet +ill *e, Music Mart Balance s'eet As o Ian 3 Assets ia*ilities an +ners Euity Cas' -325(( ?otes paya*le -125(( 9n"entory 5((( Paiin capital 25 (((  )otal  ) otal -3!5(( )otal -3!5((


Balance 'eet C'anges ale al et'at o o Merc Me rc'a 'ani nise se )'e Ian Ian 4 <oro -! -!5( 5( cas' ca s' t'e st stor ore sel sells lsecrease me merc rc'an 'ani ise se costs -5((. e8ect t'is transaction iseto in"entory *y -5(( increase cas' *y -!5( an increase o+ners euity *y t'e i8erence -25(. )'e -25( is t'e pro=t on t'is sale.  )o  ) o istinguis' it rom t'e paiin capital portion o t'e o+ners euity it is recore as retaine earnings. )'e *alance s'eet is, . Music Mart Balance s'eet As o Ian 4 Assets ia*ilities ia*ilities an an +ners +ners Euity Euity Cas' -3325( ?otes paya*le -125(( 9n"e 9n "ent ntor ory y 45( 45(( ( Pai aiin in ca capi pita tall 25 25 ((( ((( $etaine earnings 25(  )otal  ) otal





Case 21, Maynar Company :A;

Diane Maynar mae t'e ollo+ing reuest o a rien, $y boo%%eeper has quit& and ' need to see the balance sheets of my company! (e has left behind a boo% with the numbers already entered in it! )ould you be willing to prepare balance forabout me* Also& any comments  you caresheets to ma%e the numbers would be would appreciated! The cash account is healthy healthy&& which is a good sign& and he has told me that the net income in +une was ,-.&/01!


Case 21, Maynar Company :A;  )'e *oo0 containe a etaile et aile recor recor o transactions an rom it t'e rien +as a*le to copy *alances t'een o *eginning o o8 t'et'e mont' an atatt'e t'e mont' as s'o+n in E7'i*it 1. Diane Maynar o+ne all t'e stoc0 o Maynar Company. At t'e en o Iune. Diane Maynar pai 'ersel an -11!(( i"ien an use t'e money to repay 'er loan rom t'e company


E7'i*it 1, Maynar  Accounts payable  Accounts receivable  Accrue !a"es payable  Accuulate epreciation on builin"  Accuulate epreciation on e%uipent

Ju ne 1 $ 8,517.00 $ 21,798.00 $ 1,97#.00 $ 156,000.00 $ 5,30#.00

June 30 $ 21,315.00 $ 26,505.00 $ 2,202.00 $ 157,950.00 $ 5,928.00

&an' notes payable &uilin" (apital stoc' (as) *%uipent +at cost -an erc)anise inventory /ote receivable, iane aynar t)er noncurrent assets t)er noncurrent liabilities repai insurance

$ 8, 8,385.00 $ 585,000.00 $ 390,000.00 $ 3#,983.00 $ 13,260.00 $ 89,700.00 $ 29,835.00 $ 11,700.00 $ #,857.00 $ 2,#51.00 $ 3,150.00

$ 29,250.00 $ 585,000.00 $ 390,000.00 $ 66,660.00 $ 36,660.00 $ 89,700.00 $ 26,520.00 $  $ 5,265.00 $ 2,#51.00 $ 2,826.00

4 ep tapin u liees oenar)nainn"s

$ 2215,,551519.0.000 $

$ $ 2296,,#6#360..0000

Company :A;

aes payable






Case 21, Maynar Company :A;

Nuestions, 1. Prepare *alance s'eets as o Iune 1 an as o  Iune 3( in proper proper ormat. 2. Ma0e comments a*out 'o+ t'e =nancial conition as o t'e en o Iune compare +it' t'at at t'e *eginning o Iune. 3. 'y o retaine earnings not increase *y t'e amount o Iune net income 4. As o Iune 3( o you eel t'at Maynar Company is +ort' t'e amount in 'are'olers

Euity -61&446 E7plain.


As o Iune 1,

Di8erence  )otal  ) otal asset F -4335( 3(,

As o Iune


As o Iune 1,

Di8erence  )otal  ) otal lia*ilities 3(, F -35415

As o Iune


As o Iune 1,

Di8erence o+ners euities 3(, F -!&35

As o Iune


3. 'y o retaine earnings not increase incr ease *y t'e amount o Iune net income ?et income or Iune F -1&635 $etaine ea earning rning  Iune 3( F -22&446 $etaine ea earning rning  Iune 1 F -221511 Di"ien F -11!(( $etaine ea earning rning  Iune 3( F $etaine earning  Iune 1 / ?et income  Di"ien F 221!11 / 1&635  11!(( F 22&446


4. As o Iune 3( o you eel t'at Maynar Company is +ort' t'e amount in 'are'olers Euity -61&446 E7plain ?et income or Iune F -1&635 Assume it is t'e net mont'ly income t'en  IanIun  Ian Iun net income F -11!#1( Companys +ort' F 61&446 / 11!#1(  - !3!256

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