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Basic Accounting Concepts: The Balance Sheet

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2Part One: Financial Accounting

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• Accounting period

• Conservatism

• Realization

• Matching

• Consistency

• Materiality

Basic Concepts

• Money measurement

• Entity

• Going concern

• Cost

• Dual aspect

Slide 2-1

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Owner

The Entity Concept

The owner of a clothing store removes $100 from the store’s cash register for personal use. Should the store’s accounting

records show that the owner took this cash?

Slide 2-2

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The Entity Concept

Yes, because of the entity concept. This concept requires that the accounting records of the

clothing store show that the business has less cash than it had previously.

Slide 2-3

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The Going -Concern Concept

A thriving blue jeans manufacturing firm has jeans in various stages of production.

If the firm had to cease operations and liquidate today, the jeans would have little, if any, value. If today is the last day of the

accounting period, should the jeans be shown at liquidation value?

Slide 2-4

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The Going -Concern Concept

Because of the going-concern concept, the firm would not value

the jeans at what they are currently worth--the liquidation value.

Slide 2-5

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The Cost Concept--Nonmonetary Assets

Land purchased last year for $250,000 has a current market value of $270,000. What amount should be shown in the

accounting records to reflect ownership of this land?

Slide 2-6

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The Cost Concept--Nonmonetary Assets

The land should be shown at the original purchase price of $250,000 because of the cost concept.

Slide 2-7

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The Cost Concept--Monetary Assets

A company invested surplus cash in 100,000 shares of the common stock of General Electric. The cost of per share was $60; therefore, the firm spent $6,000,000. By the end of the

fiscal period, the stock had a fair market value of $65 per share.

What amount should be shown on the balance sheet?

Slide 2-8

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The Cost Concept--Monetary Assets

The fair value of the stocks is $6,500,000.

This is the amount that should be shown for this monetary asset.

Slide 2-9

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The Dual-Aspect Concept Slide 2-10

Ms. Jones opens a bank account for the business by depositing $40,000.

Ms. Jones opens a bank account for the business by depositing $40,000.

Assets = Liabilities + Owners’ equity

Assets = Equities

+ $40,000 + $40,000=

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The Dual-Aspect Concept Slide 2-11

The business borrows $15,000 from the bank.

The business borrows $15,000 from the bank.

+ $40,000 = $40,000

Assets = Liabilities + Owners’ equity

+ 15,000 + 15,000

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Assets = Liabilities + Owners’ equity

The Dual-Aspect Concept Slide 2-12

Assets = EquitiesAssets = Equities

+ $40,000 = $40,000

+ 15,000 + 15,000

$55,000 $15,000 $40,000

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Name of entityName of statementMoment of time

GARSDEN CORPORATIONBalance Sheet

As of December 31, 1998

The Balance Sheet--The Heading Slide 2-13

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Current assets:Cash $ 3,448,891Marketable securities 246,221Accounts receivable 5,954,588Inventories 12,623,412Prepaid expenses 377,960

Total current assets $22,651,072Property, plant, and equipment:

Land 642,367Building and equipment, at cost 26,303,481

Less: accumulated depreciation 13,534,069 12,769,412Other assets:

Investments 110,000Intangible assets 63,214 173,214

Total assets $36,236,065

The Balance Sheet--Assets Slide 2-14

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Slide 2-15The Balance Sheet--Liabilities and Shareholders’ Equity

Current liabilities:Accounts payable $ 6,301,442Taxes payable 1,672,000Accrued expenses 640,407Deferred revenues 205,240Current portion of long-term debt 300,000

Total current liabilities $ 9,119,089Long-term debt 3,000,000

Total liabilities 12,119,089Shareholders’ equity:

Paid-in capital 5,000,000Retained earnings 19,116,976

Total shareholders’ equity 24,116,976Total liabilities and shareholders’ equity $36,236,065

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CashFunds that are readily available for

distributionMarketable securities

Investments that are both readily marketable and expected to be converted into cash withinone year

Accounts receivableAmounts owed to the entity by its

customers

CashFunds that are readily available for

distributionMarketable securities

Investments that are both readily marketable and expected to be converted into cash withinone year

Accounts receivableAmounts owed to the entity by its

customers

Account Categories--Current Assets Slide 2-16

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InventoriesAggregate of items either held for sale in the ordinary course of the business, inprocess of production for such sale, orsoon to be consumed in production

Prepaid expensesAssets, usually of an intangible nature, whose usefulness will expire in the near future

InventoriesAggregate of items either held for sale in the ordinary course of the business, inprocess of production for such sale, orsoon to be consumed in production

Prepaid expensesAssets, usually of an intangible nature, whose usefulness will expire in the near future

Slide 2-17Account Categories--Current Assets

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Accounts payableClaims of suppliers arising from

their furnishing goods or services to the entity for which they have not been paid

Taxes payableAmount the entity owes

governmental agencies

Accounts payableClaims of suppliers arising from

their furnishing goods or services to the entity for which they have not been paid

Taxes payableAmount the entity owes

governmental agencies

Account Categories--Current Liabilities Slide 2-18

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Accrued expensesAmounts earned by outside parties buthave not been paid by the entity

Deferred revenuesLiabilities that arise because the entityreceives advanced payments for servicesthe entity has agreed to render in the future

Current portion of long-term debt

Accrued expensesAmounts earned by outside parties buthave not been paid by the entity

Deferred revenuesLiabilities that arise because the entityreceives advanced payments for servicesthe entity has agreed to render in the future

Current portion of long-term debt

Account Categories--Current Liabilities Slide 2-19

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Music Mart Slide 2-20

On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.

On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.

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Music Mart Slide 2-21

On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.

On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.

MUSIC MARTBalance Sheet

As of January 1

Assets Liabilities and Owners’ Equity

Cash $25,000 Paid-in capital $25,000

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Music Mart Slide 2-22

On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.

On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.

MUSIC MARTBalance Sheet

As of January 1

Assets Liabilities and Owners’ Equity

Cash $25,000 Paid-in capital $25,000

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Cash $37,500 Notes payable $12,500Paid-in capital 25,000

Total $37,500 Total $37,500

Music Mart Slide 2-23

On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.

On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.

MUSIC MARTBalance Sheet

As of January 1

Assets Liabilities and Owners’ Equity

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Cash $32,500 Notes payable $12,500Inventory 5,000 Paid-in capital 25,000Total $37,500 Total $37,500

Music Mart Slide 2-24

On January 3, the business buys inventory in the amount of $5,000, paying cash.

On January 3, the business buys inventory in the amount of $5,000, paying cash.

MUSIC MARTBalance Sheet

As of January 1

Assets Liabilities and Owners’ Equity

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Cash $33,250 Notes payable $12,500Inventory 4,500 Paid-in capital 25,000

Retained earnings 250Total $37,750 Total $37,750

Music Mart Slide 2-25

On January 4, the business sells merchandise that cost $500 for $750. Cash was received.

On January 4, the business sells merchandise that cost $500 for $750. Cash was received.

MUSIC MARTBalance Sheet

As of January 1

Assets Liabilities and Owners’ Equity

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Chapter 2

The End