Balance Sheet

Learning Outcomes

  • Prepare a balance sheet

The balance sheet shows the accounting equation: [latex]\text{A}=\text{L}+\text{E}[/latex].

You’ve already calculated owner’s equity on the Statement of Owner’s Equity as $17,350, so now let’s account for the assets and liabilities.

First, list out the assets (in blue) from the adjusted trial balance, the liabilities (in red), and the equity total (in green).

NeatNiks
Adjusted Trial Balance
For the month ended October 31, 20XX
Reference No. Accounts Adjusted trial balance
Debits Credits
110 Checking 3,500.00
120 Accounts Receivable 5,650.00
125 Supplies 1,000.00
130 Prepaid Rent 10,000.00
210 Account Payable 1,600.00
220 Contractor Payable 1,200.00
310 Nick Frank, Capital Contributions 20,000.00
330 Nick Frank, Withdrawals 4,000.00
410 Service Revenue 8,750.00
510 Insurance Revenue 1,500.00
520 Rent Expense 2,000.00
530 Supplies Expense 1,600.00
540 Contractor Expense 2,300.00
Totals Single line 31,550.00
Double line		 Single line 31,550.00
Double line

 

Neatniks
Balance Sheet
As of October 31, 20XX
Description Amount
Subcategory, Assets
Cash $3,500
Accounts Receivable 5,650
Supplies 1,000
Prepaid Rent 10,000
Total Assets Single line
$20,150
Double line
Subcategory, Liabilities
Accounts Payable $1,600
Wages Payable 1,200
Total Liabilities Single line
$2,800
Subcategory, Owner’s Equity
17,350
Total Liabilities and Owner’s Equity Single line
$20,150
Double line

Total assets, at historical cost, equal $20,150. Of that amount, Nick owes $2,800 to a creditor and his independent contractors, leaving him $17,350 in equity.

Now you can answer the remaining questions Nick had at the end of October:

  • What is Nick’s equity in his business at the end of October?
    • $17,350
  • Nick wants to buy a truck for $5,000 in order to keep up with demand—does he have enough cash in the bank to do that right now?
    • No. He only had $3,500 in the bank as of October 31. In addition, he has bills to pay that amount to $2,800 (accounts payable and contractor payable). However, once he collects his accounts receivable, he may have enough cash.
  • How much do customers owe Nick?
    • Accounts receivable are the invoices that Nick has sent out to customers that haven’t been paid yet, so they owe him in total $5,650.
  • How much does Nick owe to his suppliers?
    • Accounts payable represents the amount a business owes to suppliers. In this case, Nick has purchased items on credit and still owes $1,600 to the vendors. He also owes $1,200 to workers.

Account Format of Balance Sheets

The balance sheet above is reported in the common report format. There is another format, called the account format, that was more common when society was less complex. You might not ever see this format again, but here it is as an example:

Neatniks
Balance Sheet
As of October 31, 20XX
Description Amount Description Amount
Subcategory, Assets Subcategory, Liabilities
   Cash $3,500    Accounts Payable $1,600
   Accounts Receivable 5,650    Contractor Payable 1,200
   Supplies 1,000    Total Liabilities Single line
$2,800
   Prepaid Rent 10,000
Owner’s Equity $17,350
Total Assets Single line
$20,150
Double line		 Total Liabilities and Owner’s Equity Single line
$20,150
Double line

Notice that assets are presented on the left, and liabilities and owner’s equity on the right.

The reason you don’t see this format much anymore is because it takes up so much real estate—we just don’t have the room to present our statements in multiple columns like that, especially because GAAP requires us to show multiple years side-by-side.

Example: Huron Consulting Group

Here’s an actual income statement from Huron Consulting Group, Inc. (NASDAQ:HURN), a publicly traded consulting firm, condensed down from 26 lines to just 3, but you can see how trying to present each year with multiple columns would end up spreading it out way too far:

HURON CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATION – condensed
(in thousands of dollars)
Year Ended December 31,
Description 2019 2018 2017
Revenues $965,474 $877,999 $807,745
Expenses 923,731 864,353 923,731
Net income (loss) Single Line$41,743Double Line Single Line$13,646Double Line Single Line$(107,117)Double Line

And here are the balance sheets, once again condensed down from about twice this many line items. Notice how impossible it would be to present these in the account format, so that’s why the report format (assets first, then liabilities, and finally the equity, top to bottom) is so much more widely used.

Subcategory,Assets

HURON CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEETS – condensed
(in thousands of dollars)
Description December 31, 2019 December 31, 2018
Current assets:
Cash and cash equivalents $ 11,604 $ 33,107
Receivables from clients, net 116,571 109,677
Unbilled services, net 79,937 69,613
Income tax receivable 2,376 6,612
Prepaid expenses and other current assets 14,248 13,922
Total current assets Single Line$ 224,736 Single Line$ 232,931
Property and equipment, net 38,413 40,374
Other non-current assets 841,122 776,227
Total assets Single Line$ 1,104,271Double Line Single Line$ 1,049,532Double Line
Subcategory,Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 7,944 $ 10,020
Accrued expenses and other current liabilities 54,995 298,460
Accrued payroll and related benefits 141,605 109,825
Total current liabilities Single Line$ 204,544 Single Line$ 418,305
Long-term debt, net of current portion 314,262 90,603
Total liabilities Single Line$ 518,806 Single Line$ 508,908
Total stockholders’ equity 585,465 540,624
Total liabilities and stockholders’ equity Single Line$ 1,104,271Double Line Single Line$ 1,049,532Double Line

We won’t look at the statement of stockholders’ equity (owners of a corporation are called stockholders)—not yet anyway. We will look at that statement more closely in a later module on corporations. You can also check out Huron Consulting Group’s full annual report.

As a publicly traded company, Huron Consulting Group is required to publish the financials and make them available to the public, and so they must follow GAAP and file their report with the SEC (Form 10-K) every year.

Also, notice that these numbers are rounded to the nearest thousand, so the actual amount of assets this company owns is in excess of $1 billion. Do assets equal liabilities plus owners’ equity?  (The answer had better be a resounding “yes”.)

The income statement, statement of owner’s equity, and balance sheet give you a lot of information about a company. There are actually several more statements that deal with specific issues that we will cover later, but one more common statement is the statement of cash flows, introduced in the next section and covered in more detail later.

First, let’s review the three basic financials and then you can check your understanding of the balance sheet.

Practice Question