Lesson 4: Balance Sheet Accounts: Sub-Categorical Imperatives

Assets

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

Liabilities

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.

Equity Or Fund Balance

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 liabiltiy businesses.

Proprietorship Equity

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.

Partnership Equity

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”.

Shareholder Equity

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.