THE BALANCE SHEET

The Balance Sheet

A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report.  The most common use of the balance sheet is as the basis for ratio analysis, to determine the liquidity of a business. Liquidity is essentially the ability to pay one's debts in a timely manner. The information listed on the report must match the following formula:

                         Total assets = Total liabilities + Equity

The balance sheet is one of the key elements in the financial statements, of which the other documents are the income statement and the statement of cash flows. A statement of retained earnings may sometimes be attached.

The format of the balance sheet is not mandated by accounting standards, but rather by customary usage. The two most common formats are the vertical balance sheet (where all line items are presented down the left side of the page) and the horizontal balance sheet (where asset line items are listed down the first column and liabilities and equity line items are listed in a later column). The vertical format is easier to use when information is being presented for multiple periods.

The line items to be included in the balance sheet are up to the issuing entity, though common practice typically includes some or all of the following items:

Current Assets:

Cash and cash equivalents

Trade and other receivables

Investments

Inventories

Assets held for sale

Non-Current Assets:

Property, plant, and equipment

Intangible assets

Goodwill

Current Liabilities:

Trade and other payables

Accrued expenses

Current tax liabilities

Current portion of loans payable

Other financial liabilities

Liabilities held for sale

Non-Current Liabilities:

Loans payable

Deferred tax liabilities

Other non-current liabilities

Equity:

Capital stock

Additional paid-in capital

Retained earnings

Here is an example of a balance sheet:

Read More

SUBLEDGER

Subledger

Definition: A subledger is a ledger containing all of a detailed sub-set of transactions. The total of the transactions in the subledger roll up into the general ledger. For example, a subledger may contain all accounts receivable, or accounts payable, or fixed asset transactions. Depending on the type of subledger, it might contain information about transaction dates, descriptions, and amounts billed, paid, or received. A summary-level entry is periodically recorded in the general ledger. If someone is researching information in the general ledger in an account that contains this summarized level of information, he or she must then access the subledger to review transaction-specific information.

As part of their year-end tests, auditors may trace transactions from a subledger to the general ledger and from there to the financial statements, to ensure that transactions are being recorded properly in the accounting system.

In an accounting software package, a subledger is a database, rather than a manually-maintained book.

Similar Terms

A subledger is also known as a subsidiary ledger.

Read More

ACCOUNTING JOURNAL ENTRIES

Accounting Journal Entries Definition

An accounting journal entry is the method used to enter an accounting transaction into the accounting records of a business. The accounting records are aggregated into the general ledger, or the journal entries may be recorded in a variety of sub-ledgers, which are later rolled up into the general ledger. This information is then used to construct financial statements as of the end of a reporting period.

There must be a minimum of two line items in a journal entry, though there is no upper limit to the number of line items that can be included. A two-line journal entry is known as a simple journal entry, while one containing more line items is called a compound journal entry. A company may use a great many journal entries in just a single accounting period, so it is better to use a larger number of simple journal entries than a smaller number of compound journal entries, in order to clarify why the entries are being made. This is useful when journal entries are being researched at a later date, and especially when they are being reviewed by auditors.

Whenever you create an accounting transaction, at least two accounts are always impacted, with a debit entry being recorded against one account and a credit entry against the other account.

The totals of the debits and credits for any transaction must always equal each other, so that an accounting transaction is always said to be "in balance." If a transaction were not in balance, then it would not be possible to create financial statements. Thus, the use of debits and credits in a two-column transaction recording format is the most essential of all controls over accounting accuracy.

In a smaller accounting environment, the bookkeeper may record journal entries. In a larger company, a general ledger accountant is typically responsible for recording journal entries, thereby providing some control over the manner in which journal entries are recorded.

Format of the Journal Entry

At a minimum, an accounting journal entry should include the following: 

• The accounts into which the debits and credits are to be recorded
• The date of the entry
• The accounting period in which the journal entry should be recorded
• The name of the person recording the entry
• Any managerial authorization(s)
• A unique number to identify the journal entry
• Whether the entry is a one-time entry, a recurring entry, or a reversing entry.
• It may be necessary to attach extensive documentation to the journal entry, to prove why it is being recorded; at a minimum, provide a brief description of the journal entry.

SOURCE BY: ACCOUNTING TOOLSⓇ

Read More

WHAT IS THE PURPOSE OF ACCOUNTING..?

What is the purpose of accounting?

The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.

This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplier invoices, or through more specialized transactions, known as journal entries.

Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: 

• Income statement
• Balance sheet
• Statement of cash flows
• Statement of retained earnings
• Disclosures that accompany the financial statements

Financial statements are assembled under certain sets of rules, known as accounting frameworks, of which the best known are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The results shown in financial statements can vary somewhat, depending on the framework used. The framework that a business uses depends upon which one the recipient of the financial statements wants. Thus, a European investor might want to see financial statements based on IFRS, while an American investor might want to see statements that comply with GAAP.

The accountant may generate additional reports for special purposes, such as determining the profit on sale of a product, or the revenues generated from a particular sales region. These are usually considered to be managerial reports, rather than the financial reports issued to outsiders.

Thus, the purpose of accounting centers on the collection and subsequent reporting of financial information.

SOURCE BY: ACCOUNTING TOOLS®

Read More

UNDERSTANDING ACCOUNTING BASICS (ALOE AND BALANCE SHEETS)

Understanding Accounting Basics (ALOE and Balance Sheets)

In accounting, the math usually isn't worse than multiplication. But accounting isn't about math -- it's about concepts, and some had me confused. Accounting has simple and surprisingly elegant ways to track a business.

So What's Accounting About, Anyway?

To be blunt, accounting is about tracking stuff (yes, there's more to it, but hang with me). What kind of stuff can we track? 

• Assets: Stuff inside the company
• Liabilities: Stuff that belongs to others
• Owner's Equity (aka Capital): Stuff that belongs to the owners

Simple enough. Now how are these related?

Assets = Liabilities + Owner's Equity

In layman's terms, everything the company has belongs to the owners or someone else. Think of the equation like this:

• assets = liabilities + owner's equity
• stuff the company has = other people's stuff + owner's stuff

This formula (also called ALOE) might seem strange at first. Why do we add liabilities? Because we're looking from the point of view of the company, not the shareholders. If the company has something, it could be owed to someone else.

From the owner's point of view, owner's equity = assets - liabilities. This equation looks more natural, but often we aren't interested in the owner's point of view. We want to know about the company.

What's a balance sheet?

A balance sheet is a document that tracks a company's assets, liabilities and owner's equity at a specific point in time. As you know, if the company's has something, it belongs to someone. The sides must balance. So let's do an example. Suppose we start a company with $100 cash:

The company has $100 in short-term investments, and the owners have $100 worth of stock (how ownership is represented in a company).

Now suppose we take a bank loan for $150. The balance sheet becomes this:

Now our company has $250, but $150 belongs to the bank and $100 belongs to the owners. Sorry guys -- you can't take out a loan and make your share of the company more valuable.

Next, let's buy a building for $200:

Buying a building doesn't make our company more valuable: we re-arranged our assets. Instead of $250 in cash, we have $50 in cash and $200 in "building". Our share of the company ($100) didn't change a lick. And we still owe the bank $150.

That's not how it really works, is it?

It is. Well, real accountants use fancier terms ("accounts receivable" vs "deadbeats who owe me"), and have a bigger, badder balance sheet. But the core idea is the same: show what the company's worth, and who owns what.

Take a look at the balance sheet for a small internet company:

Read More