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 and numbered in the 100s) from the adjusted trial balance, the liabilities (in red and numbered in the 200s), and the equity total (in green and numbered in the 300s, 400s, and 500s).
| 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 Expense | 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 |
|
| 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:
| 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:
| (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
| (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.
You can view the transcript for “Preparing the Financial Statements (Financial Accounting Tutorial #25)” here (opens in new window).
Practice Question
