The Fundamental Accounting Equation
A Simple Balance Sheet and Income Statement
Debits and Credit Transaction Posting Rules
8b. Another Cash Transaction Posting Example
Accounts Payable and Wage Withholding
Prepaid Expenses and Deferred Revenue
Inventory and Cost of Goods Sold
The Lower of Cost or Market Rule
Financial Statement Preparation
16. The Reliability of Financial Statements
Relative Measures of Economic Performance
It is useful to sub-categorize assets, liabilities and equity into balance sheet accounts. Here are some typical accounts by category.
Cash: The balance of coins and currency on hand and funds held in checking, savings and money market accounts.
Accounts Receivable: Customers’ promises to pay later for goods or services already provided.
Prepaid Expenses: Payments toward an expense that a business will not benefit from until some time later, e.g., a one-month rental deposit.
Inventory: Goods sold to customers.
Fixed assets: Tangible assets expected to last over a year that enable a business to provide goods or services
Accounts Payable: A firm’s promise to pay later for services or goods already received.
Notes Payable: Loans made to a business.
Withheld Taxes: Taxes withheld from employees’ wages.
Accrued Payroll Taxes: Employer’s share of payroll taxes owed.
Deferred Revenue: Cash collected by a business now for services or goods to be provided later, e.g., a year’s magazine subscription collected by a magazine publisher in advance.
The equity section of a balance sheet has different account names, depending upon the legal structure of the business. A business may have unlimited liability or limited liability. Limited liability businesses include corporations, limited liability companies (LLCs), or limited liability partnerships (LLPs). The distinguishing feature of limited liability firms is that the owners’ personal liability for firm actions is limited to the amount they have invested.
Unlimited liability firms include sole proprietorships and general partnerships. In these firms the owners have unlimited liability for the actions of the business. The distinction between limited and unlimited liability businesses boils down to the extent to which an owner can be sued for the actions of the business.
Click for an example on the difference between limited and unlimited liability businesses.
An unincorporated business with one owner is a sole proprietorship. Its equity categories are broken down as follows:
Owner’s Equity: Cash or property contributed to a business by its owner.
Owner’s Withdrawals: Cash or property distributed to an owner from the business.
An unincorporated business with more than one owner is a partnership. If a partnership has two owners, the equity section would contain the following accounts:
Partner A Equity: Property or cash contributed by partner A to the partnership.
Partner A Withdrawals: Property or cash distributed by the partnership to partner A.
Partner B Capital: Property or cash contributed by partner B to the partnership.
Partner B Withdrawals: Property or cash distributed by the partnership to partner B.
Separate pairs of similar accounts would be required for any additional partners in the partnership. Sometimes Owner or Partnership Equity accounts are labeled “Partner Capital” or “Owner Capital”. Owner or Partnership Withdrawals accounts are sometimes labeled as simply “Owner Draws” or “Partner Draws”.
A limited liability business is usually called a corporation. Its owners are called shareholders, because they are issued common stock certificates that represent their share of ownership in the business. The equity section of an incorporated business would be broken down into at least these sub-accounts:
Common Stock: The original amount of cash and/or property shareholders contribute to a business in exchange for common shares.
Dividends Paid: Cash or property paid to shareholders from business net income.
Retained Earnings: The amount of net income not distributed to shareholders in the form of dividends.
The equity section of a non-profit’s balance sheet is called its fund balance. This category usually has three accounts:
Unrestricted Fund Balance: The portion of the organization’s fund balance that is not restricted to any particular activity.
Temporarily Restricted Fund Balance: The portion of the organization’s fund balance that is temporarily restricted for certain purposes..
Permanently Restricted Fund Balance: The portion of the organization’s fund balance that is permanently restricted for certain purposes.