Accounting and Finance Reporting: The Balance Sheet Primer

Definition: Balance Sheet
A summary of a company's financial condition at a specific point in time, including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders' equity).

Let’s begin by looking at what financial statements do.
"The real problem is usually two or three questions deep. If you want to go after someone’s problem, be aware that most people aren’t going to reveal what the real problem is after the first question." ~ Jim Rohn, World-renowned business philosopher.
Financials Basics – The Primer:
A Snapshot is “a picture” of your company's financial condition on any given date.
When looking at a "T-account" (In double-entry bookkeeping, a widespread accounting method, all financial transactions are considered to affect at least two of a company's accounts – debit/credit) for each of the account classifications in the general ledger, here is the debit or credit balance you would typically find in the account type:

Why you might care: Your accounting knowledge is your business’ ace in the hole. Knowing an account’s “normal” balance helps you understand what to expect and why the sum of two accounts may not equal 1+(-)1=2.
So, let's try to decipher the accountant’s conversation. I've broken the terms into two primary areas: balance sheet and other financials. You will see a variety of formats, charts, and reporting styles. This is done to show that not all versions are right or wrong. However, by offering you different perspectives on financial reporting information, you may see a context that helps reinforce better understanding and frame future thinking in what you are already using.
Balance Sheet and Other Financial Analysis:

• Balance Sheet
• Assets:
• Current Assets
  • Assets that will "turn over" within 12 months
  • Assets “turnover-ratio” measures a company’s efficiency using its assets in generating revenue - the higher the number, the better. It also may indicate pricing strategy: companies with low-profit margins tend to have high asset turnover, while those with high-profit margins have low asset turnover.
• Prepaid Expense
  • Expenses not yet incurred (invoiced to you) but have been paid...e.g., auto insurance premium in advance for a six-month period. Example: Each month, 1/6 of the advance payment is written off to expense, leaving the balance as a current asset.
• Fixed Assets Machinery & Equipment,
  • Furniture & Fixtures – lathes, punches, presses, sewing machines, office desks
• Liabilities:
• Current Liabilities
  • Amounts owed to others payable within 12 months
• Accrued Expenses
  • Expenses incurred but not yet billed to you
• Other Liabilities
  • Long-term, notes payable, deposits on account - payable in more than 12 months
• Equity:
• Retained Earnings
  • Accumulated Net Profits & Losses over the life of the company, less (-) dividends paid to shareholders

If what you see on the following pages makes sense, you’re probably in pretty good shape, if not, please read on to discover more accounting mysteries unwrapped.
Why might you care? – If you don’t know what your enterprise financial management system is telling you, your business is at risk. Financial understanding is the basis of successful enterprises and decision support.

BALANCE SHEET

What is the accounting entry reflecting the following transactions?

• Purchased $5,000 of inventory from a vendor on 30-day payment terms? (Debit Inventory Asset, Credit Accounts Payable Liability)
• Purchased $5,000 of inventory from a vendor and paid cash at the time of purchase? (Debit Inventory Asset, Credit Cash in Bank Asset)
• Received $2,500 from a customer in payment of your invoice dated 30 days ago? (Debit Cash in Bank Asset, Credit Accounts Receivable Asset)
• You paid a vendor $2,500 for an invoice billed to you for goods purchased 30 days ago? (Debit Accounts Payable Liability, Credit Cash in Bank Asset)
• Paid $1,000 for auto insurance for the period 1/1/2011 to 6/30/2011? (Debit Accounts Payable Prepaid Liability, Credit Cash in Bank Asset)
• You owe the IRS $500 for employer payroll taxes incurred before 12/31/2010 but will not be paid until 01/10/2011. (Debit Payroll Tax Expense, Credit Accounts Payable Liability)

Why you might care? – Your Balance Sheet informs you about the kinds and degrees of financial risk you face. In this context, risk — and opportunity — has three basic levels:

• Liquidity: Do you have adequate access to cash to meet operating needs?
• Adaptability: Do you have flexible funds allowing adjustments as circumstances change?
• Durability: Can you access sufficient funds to address the range of future years' needs?

For more information or request your free copy of the e-book, "Accounting It's All Greek To Me, Email: [email protected].