Financial statements are the final product of the accounting process. They provide information on the financial condition of a company. The balance sheet, one type of financial statement, provides a summary of what a company owns and what it owes on one particular day.
Assets represent everything of value that is owned by a business, such as property, equipment, and accounts receivable. On the other hand, liabilities are the debts that a company owes-for example, to suppliers and banks. If liabilities are subtracted from assets (assets – liabilities), the amount remaining is the owners’ share of a business. This is known as owners’ or stockholders’ equity.
One key to understanding the accounting transactions of business is to understand the relationship of its assets, liabilities, and owners’ equity. This is often represented by the fundamental accounting equation: assets equal liabilities plus owners’ equity.
ASSETS = LIABILITIES + OWNERS’ EQUITY
These three factors are expressed in monetary terms and therefore are limited to items that can be given a monetary value. The accounting equation always remains in balance; in other words, one side must equal the other.
The balance sheet expands the accounting equation by providing more information about the asstes, liabilities, and owners’ equity of a company at a specific time (for example, on December 31, 1993). It is made up of two parts. The first part lists the company assets, and the second part details liabilities and owners’ equity. Assets are divided into current and fixed assets. Cash, accounts receivable, and inventories are all current assets. Property, buildings, and equipment make up the fixed assets of a company. The liabilities section of the balance sheet is often divided into current liabilities (such as accounts payable and income taxes payable) and long-term liabilities (such as bonds and long-term notes).
The balance sheet provides a financial picture of a company on a particular date, and for this reason it is useful in two important areas. Internally, the balance sheet provides managers with financial information for company decision making. Externally, it gives potential investors data evaluating the company’s financial position.
Comprehension
1. Answer the following questions about the balance sheet. Question whit asterisk (*) cannot be answered directly form the text.
1. What is the final product of the accounting process?
2. What is a balance sheet?
3. Does the balance sheet provide financial information for a long period of time (for example, January to June 1993) or does it provide information for a specific point in time (for example, on June 30, 1993)?
4. What is the difference assets and liabilities?
5. How is owners’ or stockholders’ equity determined?
6. How can the relationship between assets, liabilities, and owners’ equity be represented?
7. Does the accounting equation always remain in balance?*Why or why not?
8. How can a business use a balance sheet?*As a manager, how would you find a balance sheet useful?
Answer.
A. 1. The final product of accounting process is the balance sheet.
2. A balance sheet is a final statement that a provide a summary of what a
company owns and what it owes on a particular day.
3. It provides information for a specific point in time, for example, on June 30,
1993.
4. Assets represent everything of value that is owned by a business, liabilities are
the debts that is a company owes.
5. Owners’ is stockholders’ equity is determined by subtracting liabilities from
Assets.
6. It can be represented by the fundamental accounting equation assets equal
Liabilities plus owners’ equity.
7. Yes, it does. Because one side must equal the other. If not, it must be wrong
with the recording.
8. A balance sheet is useful for a business, because it provide a financial picture
of a company or a particular day.
2. Complete the balance sheet by writing in the correct terms from the list below.
Assets Current liabilities Long-term liabilities
Liabilities Fixed assets Current assets
Stockholders equity
International Manufacturing, Inc.
Balance Sheet
December 31, 1993
Assets
Current assets
Cash $ 49,400
Account receivable 1,600
Inventories 53,000
Total $ 104,000
Fixed assets
Property $ 15,000
Buildings 50,000
Equipment 10,000
Total $ 75,000
Total assets $ 179,000
Liabilities
Current liabilities
Account payable $ 30,000
Income tax payable 19,000
Total $ 49,000
Long-term liabilities
Bonds $ 20,000
Long-term notes 40,000
Total $ 60,000
Total liabilities $ 109,000
Stockholders’ equity
Common stock $ 47,000
Retained earnings 23,000
Total $ 70,000
Total liabilities and $ 179,000
stockholders’ equity
Vocabulary Exercises
1. Write down any terms that you did not understand in the reading. Find each term in the reading, look at its context, and try to figure out the meaning. Discuss these terms with your classmates.
2. Look at the terms in the left-hand column and find the correct synonyms or definitions in the right-hand column. Copy the corresponding letters in the blanks.
1. g property (line 6) a. assets equal liabilities plus
owners equity
2. d equal (line 12) b. provide information item
by item
3. f condition (line 2) c. indicate by words or
symbols
4. b detail (line 21) d. have the same value as
5. a accounting equation (line 12) e. a series of transactions,
changes, or functions that
bring about a particular
result
6. h monetary (line 15) f. the existing circumstance
7. e process (line 1) g. anything owned by a
person
8. c express (line 15) h. of or pertaining to money
C. Discuss the following question with a partner. In giving your answers, try to use the italicized terms.
1. What is the difference between accounts receivable and accounts
payable?
2. Why are accounts receivable and cash considered current assets while
property and equipment are considered fixed assets? What do you think
the difference is between current and fixed assets?
3. The owners’ equity in a company equals assets minus liabilities. What
is meant by owners’ (or stockholders’) equity?
4. If you were a manager, how would you use the balance sheet to evaluate
your company’s financial condition?
5. What do you consider your personal assets? Do you have any
liabilities? What are they?
Answer.
1. Accounts receivable is assets and account payable is liabilities.
2. Because they are easy changed into money.
3. Net owning.
4. The manager known were the company’s financial healthy.
5. Mobile.
Text Analysis
Look at the reading to answer these question.
1. What does each of the following refer to?
LINES WORDS REFERENTS
1 they financial statement
9 this the owners’ share a business
11 this the relationship of its assets,
liabilities, and owners’ equity
15 these three factors assets, liabilities, owners’
equity
2. In line 6, what are property, equipment, and accounts receivable examples of?
Assets
3. In line 7, what do suppliers and banks refer to?
To whom the company has debts
4. In line 5-7, two different phrases are used to incorporate examples in the reading. What are these phrases?
a. Assets
b. Liabilities
5. Another method of clarification by example is the use of mathematical representations. From the reading, copy example that use mathematical symbols.
a. The fundamental accounting equation
b. Assets = liabilities + owners’ equity
Classification
Categories of the balance sheet can be classified to show the relationship between them. Fill in the following blanks on the information provided in the reading and to figure 1 (page 79).
Class : Assets Class : Liabilities
Members : Current assets Members : Current liabilities
Fixed assets Long-term liabilities
Class : Current assets Class : Current liabilities
Members : Cash Members : Account payable
Accounts receivable Income tax payable
Inventories
Class : Fixed assets Class : Long-term liabilities
Members : Property Members : Bonds
Building Long-term notes
Equipment
Application
Using the information in the reading, answer the following questions. Give reasons to support your answers.
1. Which of the following is not a fixed assets: office equipment, machinery, marketable securities, land, and buildings? Why?
Marketable securities, because its easy to change into money.
2. Are the following liabilities current or long-term: bank loans payable, accounts payable, mortgage bonds payable, taxes payable, and long-term notes payable? List each under the correct heading.
CURRENT LIABILITIES LONG-TERM LIABILITIES
Account payable Bank loans payable
Taxes payable Mortgage bonds payable
Notes payable
RSS Feed (xml)