1

Week 9: Introductory Accounting

and the Balance Sheet
Public Health Accounting and Budgeting
Lili Elkins-Thompson
Managerial and Financial Accounting

 Managerial Accounting: Internal Focus

– Plan
– Implement
– Control

 Financial Accounting: External Focus

– Record events or transactions.

– Report financial position and results of operations.
Basic Accounting Concepts
• Generally Accepted Accounting Principles
▫ From the FASB (not-for-profit and health care) or the
GASB (government)
▫ Guide the preparation of financial statements

• Accrual Concept
▫ States that revenues are recorded when the organization
has earned them and expenses are recorded when
resources are used to generate revenues
▫ Financial statements use accrual accounting.
Basic Accounting Concepts
• Money as a Measure
▫ Acct. only recognizes things that can be expressed quantitatively
in monetary terms

• Going Concern/Periodicity
▫ Assumption that a business will remain in existence indefinitely –
assets are then valued based on this
▫ Bankruptcy Values may be lower

• Matching
▫ Accountants attempt to match all expenses with revenues
generated in the achievement of objectives for a specified time
period
Basic Accounting Concepts cont.
• Duality
▫ The principle requires the identification of the source from which the
available resources of an organization are received.

• Materiality
▫ Only material matters relating to the financial data need be disclosed
in financial statements
▫ Reporting only needs to contain the level of detail and accuracy
necessary for decision making.
▫ Financial reports do not need to be exactly accurate.

• Conservatism
▫ Relates to decisions on asset valuation and income determination.
▫ In considering approximately equal acceptable alternatives, the accountant
will use the accounting practice that tends to portray the least optimistic
picture of the financial position and/or operating results of the entity
▫ Anticipate losses, not gains
Basic Accounting Concepts Cont.

• Objectivity
▫ Items and amounts recorded in financial statements should be
those that are most clearly verifiable by supporting documents or
other evidence originating outside the entity.
▫ Values should be based on an objective valuation of resources

• Cost Convention/Cost Principle

▫ When there is a dispute over value, cost is used.

• Consistency
▫ Same generally accepted accounting procedures should be used in
recording and reporting the financial data of a given entity in
successive periods
Basic Accounting Concepts Cont.

• Full Disclosure
▫ All significant financial facts should be appropriately disclosed,
either within the body of financial statements or in footnotes or
parenthetical statements.

• Entity Convention
▫ Accounting reports should be presented for each individual
economic unit or entity.
▫ Requires that you define the organizational component for which
you are trying to account.
▫ This means that each fund group has its own set of financial
statements, even if associated with the same nonprofit
organization.
Statement of Financial Accounting
Standards (SFAS) 117
• Unrestricted
▫ Preferred
▫ Can be used freely by the organization
• Permanently Restricted
▫ Donor Required
▫ Can never be met and/or is not met by the passage of time
• Temporarily Restricted
▫ Restricted by time or until donor conditions met
▫ Can reasonably expect that the agency will be able to meet the
donor restrictions
• Apply only to the net assets of the organization
Statement of Financial Accounting
Standards (SFAS) 117
• A complete set of financial statements includes the
following:
▫ A statement of financial position (balance sheet)
▫ A statement of activities (changes in net assets)
▫ A statement of cash flows
▫ Accompanying notes
▫ A statement of functional expenses (voluntary health
and welfare organizations only)

• Took effect for all nonprofits whose fiscal years began

after 12/15/94
Statement of Financial Accounting
Standards (SFAS) 117
• Financial System must be able to:
▫ Track costs as “Permanently Restricted”,
“Temporarily Restricted” and “Unrestricted” (beyond
Net Assets)
▫ Allocate costs fairly and effectively across the board.
▫ Track information based upon both funding source
and program and/or service funded
Books Used for Financial Mgmt.

• A Journal records transactions chronologically

• They are then summarized by account in a ledger

• According to the chart of accounts: assets, liabilities,

net assets, revenues and expenses
Some Definitions
• A journal entry is an entry to the journal.
• The journal is a record that keeps accounting transactions in
chronological order as they occur.
• The general ledger is a record that keeps accounting
transactions by accounts.
• Account is a unit to record and summarize accounting
transactions
• All accounting transactions are recorded through journal
entries that show account names, amounts and whether those
accounts are recorded in debit or credit side of accounts.
• The journal entry is the first entry of a transaction in the
accounting system. Before the entry is made, the following
decisions must be made:
▫ 1) which accounts area effected by the transaction; and
▫ 2) which account will be debited and which will be credited
Double Entry Accounting
• To record transactions, accounting system uses
double-entry accounting.
• Double-entry implies that transactions are always
recorded using two sides, debt and credit.
• Debit refers to the left hand side and credit refers to
the right hand side of the journal entry or account.
• The sum of the debit side amounts should equal the
sum of the credit side amounts.
• A journal entry is balanced when these sums are
equal.
Accounting for Changes in Revenues
and Expenses
• At least two accounts are always affected by each
transaction, at least one of those must be a debit and
one must be a credit.
• The sum of the debits for each transaction must equal
the sum of the credits for that same transaction.
• Whether a debit or credit increases or decreases an
account balance depends on the type of account.
▫ Asset and expense accounts are increased on the
debit side
▫ Liability, equity and revenue accounts are increased
on the credit side.
Debits and Credits of Accounts

Debit Credit

Assets Liabilities
Expenses Revenues

Debit simply means Credit simply means

left right
Debits and Credits of Accounts

Debit Credit
Increase in Asset Accounts Decrease in Asset Accounts
Increase in Expense Decrease in Expense
Accounts Accounts

Decrease in Liability Accounts Increase in Liability Accounts

Decrease in Equity Accounts Increase in Equity Accounts
Decrease in Revenue Increase in Revenue
Accounts Accounts
Graphical Reference for Increasing and
Decreasing Account Balances
Assets = Liabilities + Owners Equity

Accounts Retained
Cash Payable Earnings
Debit Credit Debit Credit Debit Credit

+ - - + - +

Expense Revenue
Debit Credit Debit Credit

+ - - +
Normal balances of Accounts
• Accounts have normal balances on the side where the
increases in such accounts are recorded.
▫ Asset accounts have normal balances on the debit side
▫ Expense accounts have normal balances on the debit side
▫ Liability accounts have normal balances on the credit side
▫ Equity Accounts have normal balances on the credit side
▫ Revenue Accounts have normal balances on the credit side
• On the financial statements, accounts are reported on
the sides where they have normal balances
 19

Financial Statements and the Balance

Sheet
Why Financial Statements Are Important

• Demonstrate to funding organizations that

organization is fiscally/managerially sound
• Indicate where management issues might be
▫ As a manager you may need to explain away problems in
your financial statements and/or develop plans to address
problems
• Audited Financial Statements Allow You To:
▫ Gain affirmation that your financial position is what you
said
▫ Help measure success
▫ Help discover fraud
The Financial Statements
 Statement of Financial Position (Balance Sheet)—a
snapshot of the resources, obligations, and worth of an
organization at a specific point in time (stock).

 Activity Statement (Operating or Income Statement)—

measures the cumulative resource inflows and outflows for an
organization over some specified period of time. It is the
reporting equivalent of an operating budget (flow).

 Cash Flow Statement—measures the cumulative cash inflows

and outflows for an organization over some specified period of
time. It is the reporting equivalent of a cash budget (flow).
Balance Sheet – Statement of Financial
Position

• Balance Sheet is a Point in Time Financial Statement

(i.e. As of 3/1/12)
• Provides a snapshot of the organization’s assets,
liabilities and net assets.
• Assets = Liabilities + Equity
• The most important indicator of an organization’s
financial health - It tells a reader what a non-profit is
worth, once liabilities (what is owed) are subtracted
from assets (what is owned)
Balance Sheet – What it shows…
• Balance sheets report
▫ What an organization owns (assets)

▫ What it owes to outsiders (liabilities)

▫ The portion of the organization's assets owned by its

owners, called…
 Owner’s Equity, Partner’s Equity, or Stockholder’s equity
(for for-profit organizations)
 Net Assets or Fund Balance (for nonprofit and
government)
The Fundamental Accounting Equation
Residual
Claims by Assets
Resources Outsiders Owned by
Owners
Assets = Liabilities + Equity

or Sources of
Resources
Assets - Liabilities = Equity

What you own - What you owe = What you are worth

Equation must always be in balance!

Balance Sheet – Statement of Financial
Position
• Shows
▫ all assets aggregated,
▫ investments reflected at market value and
▫ net assets broken out into 3 funds

• Information about Net Assets and Donor Restrictions

▫ The format of the statement of financial position usually
begins with all of the assets of the organization and deducts
the liabilities to arrive at a calculation of net assets
▫ The statement should display separate net asset amounts for
the three categories (unrestricted, temporarily restricted,
permanently restricted)
A Personal Balance Sheet
Ms. Jane Frost
Balance Sheet
As of December 31, 2013
Assets Liabilities & Net Worth

Liabilities
Cash $ 1,000 Car Loan $ 3,000
Car 12,000 Total Liabilities $ 3,000

Net Worth $10,000

Total Assets $13,000 Liabilities & Net Worth $13,000
Assets
 Assets on the balance sheet are divided into current or
short-term (those that are cash or are expected to become
cash or will be used up within twelve months) and long-
term or fixed assets (those that will not).

 Includes all items that will provide some future benefit or

enable the entity to provide services to its clients
 Short-Term or Current Assets are listed in order of
declining liquidity and normally include:
- cash,
- marketable securities,
- accounts receivable,
- notes receivable,
- inventory, and
- prepaid expenses (long-term prepaid expenses are called
Deferred Charges).
Meals for the Homeless Balance Sheet
ASSETS LIABILITIES & NET ASSETS
Current Assets Liabilities
Cash $ 1,000 Current Liabilities
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Current Portion—Mortgage 4,000
Payable
Total Current Assets $62,000 Total Current Liabilities $ 14,000

Long-Term Assets Long-Term Liabilities

Fixed Assets Mortgage Payable $ 12,000
Property $ 40,000 Total Long-Term Liabilities $ 12,000
Equipment, Net 35,000
Investments 8,000 TOTAL LIABILITIES $ 26,000
Total Long-Term Assets $ 83,000 NET ASSETS 119,000

TOTAL ASSETS $145,000 TOTAL LIABILITIES & NET $145,000

ASSETS
 29

Marketable Securities

 Marketable securities include equity and debt instruments

that can be bought and sold in public and private markets.

 The values of Marketable Securities are reported by

governments and not-for-profit organizations at fair market
value. For-profit organizations use fair market value for
reporting most of their marketable securities.
Meals for the Homeless Balance Sheet
ASSETS LIABILITIES & NET ASSETS
Current Assets Liabilities
Cash $ 1,000 Current Liabilities
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Current Portion—Mortgage 4,000
Payable
Total Current Assets $62,000 Total Current Liabilities $ 14,000

Long-Term Assets Long-Term Liabilities

Fixed Assets Mortgage Payable $ 12,000
Property $ 40,000 Total Long-Term Liabilities $ 12,000
Equipment, Net 35,000
Investments 8,000 TOTAL LIABILITIES $ 26,000
Total Long-Term Assets $ 83,000 NET ASSETS 119,000

TOTAL ASSETS $145,000 TOTAL LIABILITIES & NET $145,000

ASSETS
Long-Term Assets
 Long-Term Assets are generally divided into three categories:

- Fixed Assets, which include:

– property (land) usually recorded at cost,
– plant (buildings) recorded at cost and reported at net
book value, and
– equipment recorded at cost and reported at net book
value.

- Investments
Long-Term Assets
- Intangibles
- Intangibles that do appear on the balance sheet
- Excess amount paid in a merger beyond the value
of the corporate assets
- Viewed to be the present value of the assets not
included on the balance sheet, i.e. goodwill)

- Intangibles that do not appear on the balance sheet

- Things like the organization’s reputation for paying
bills promptly
- These are generally the intangible assets that ar
enot include as part of an exchange transaction
Meals for the Homeless Balance Sheet
ASSETS LIABILITIES & NET ASSETS
Current Assets Liabilities
Cash $ 1,000 Current Liabilities
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Current Portion—Mortgage 4,000
Payable
Total Current Assets $62,000 Total Current Liabilities $ 14,000

Long-Term Assets Long-Term Liabilities

Fixed Assets Mortgage Payable $ 12,000
Property $ 40,000 Total Long-Term Liabilities $ 12,000
Equipment, Net 35,000
Investments 8,000 TOTAL LIABILITIES $ 26,000
Total Long-Term Assets $ 83,000 NET ASSETS 119,000

TOTAL ASSETS $145,000 TOTAL LIABILITIES & NET $145,000

ASSETS
Plant and Equipment on the Balance
Sheet
 Recorded at cost when acquired.
 Reported net of accumulated depreciation on the
balance sheet.

 Suppose an organization buys a van for $30,000 and

expects to use it for five years and sell it for $5,000.
Assuming that the van will be used up evenly over the
five years, how would its value appear on the balance
sheet at the end of two years?
A Net Book Value Example
Step 1: Record the Van at Cost $30,000

Step 2: Subtract two years of depreciation

[($30,000 - $5,000 salvage)/5 yr life] * 2
= $10,000

Step 3: Net Book Value =

$30,000 cost - $10,000 accum. depreciation
= $20,000
Fixed Assets on the Balance Sheet

All three values—cost, accumulated depreciation—and net book value

are shown on the balance sheet or in notes that accompany the financial
statements. Why?

Museum A Museum B
Net Fixed Assets or
Net Book Value $ 1,000,000 $ 1,000,000

PP&E at cost $ 40,000,000 $ 2,000,000

Accumulated Depreciation (39,000,000) (1,000,000)
Net Book Value $ 1,000,000 $ 1,000,000

Are these two museums really similar or different?

Recognizing Asset Transactions
 Financial events are recorded at the time of Recognition.

 Asset transactions are recognized when:

- the assets are owned by the organization,
- the assets have a monetary value,
- that monetary value can be objectively determined.

 Which of the following should be recognized as assets?

- The amount due on a bill sent to a client?
- An LCD computer projector?
- A fundraising mailing list developed in an organization?
Liabilities
 Liabilities are categorized as short term and long term
depending on when they are due for payment.

 Short-term liabilities generally consist of:

- specific “payables” which are typically due within 30
days,
- wages or salary payable,
- accounts payable,
- short-term notes payable—that is, short-term
loans, and
- that portion of long-term debt which is due
during the coming year.
Meals for the Homeless Balance Sheet
ASSETS LIABILITIES & NET ASSETS
Current Assets Liabilities
Cash $ 1,000 Current Liabilities
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Current Portion—Mortgage 4,000
Payable
Total Current Assets $62,000 Total Current Liabilities $ 14,000

Long-Term Assets Long-Term Liabilities

Fixed Assets Mortgage Payable $ 12,000
Property $ 40,000 Total Long-Term $ 12,000
Liabilities
Equipment, Net 35,000
Investments 8,000 TOTAL LIABILITIES $ 26,000
Total Long-Term Assets $ 83,000 NET ASSETS 119,000

TOTAL ASSETS $145,000 TOTAL LIABILITIES & NET $145,000

ASSETS
Long-Term Liabilities
 Long-Term Liabilities are recorded at the Present Value of the
required future payments. They include:

- Long-Term Debt,
– Capital Leases
– Long-Term Unsecured Loans, Long-Term Notes Payable
– Mortgages
– Bonds Payable

- Pension Liabilities, and

- Contingent Liabilities.
Meals for the Homeless Balance Sheet
ASSETS LIABILITIES & NET ASSETS
Current Assets Liabilities
Cash $ 1,000 Current Liabilities
Marketable Securities 3,000 Wages Payable $ 2,000
Accounts Receivable, Net 55,000 Accounts Payable 2,000
Inventory 2,000 Notes Payable 6,000
Prepaid Expenses 1,000 Current Portion—Mortgage 4,000
Payable
Total Current Assets $62,000 Total Current Liabilities $ 14,000

Long-Term Assets Long-Term Liabilities

Fixed Assets Mortgage Payable $ 12,000
Property $ 40,000 Total Long-Term $ 12,000
Liabilities
Equipment, Net 35,000
Investments 8,000 TOTAL LIABILITIES $ 26,000
Total Long-Term Assets $ 83,000 NET ASSETS 119,000

TOTAL ASSETS $145,000 TOTAL LIABILITIES & NET $145,000

ASSETS
 Amortizing Long-Term Debt
Suppose that Meals buys a delivery van for $32,000. It finances $25,000 of
the purchase price with a five-year loan at 8% interest per annum. The loan
calls for annual payments (in arrears) of $6,261.41. How much of each year’s
payment would be interest? What would be the amounts shown on the
Balance Sheet at the end of year 3?
Beginning Loan Total Interest Repayment Ending Loan
Balance Payments Portion Portion Balance
Year 1 $25,000 $6,261 $2,000 $4,261 20,739
Year 2 20,739 6,261 1,659 4,602 16,136
Year 3 16,136 6,261 1,291 4,971 11,166
Year 4 11,166 6,261 893 5,368 5,798
Year 5 5,798 6,261 464 5,798 0

End of Year 3 Bal. Sheet:

• Short-term Liability $5,368, Long-term Liability $5,798
Liability Recognition
 Liabilities are recognized when:
 they are legally owed,

 have to be paid, and

 the amount to be paid can be measured objectively.

 Which of the following should be recognized as a liability?

 A bill received from a vendor?

 Wages that are due to a worker?

 A $5 million lawsuit filed against an organization?

Net Asset Categories
 The net worth of an organization represents the sum of the
organization’s earnings from inception plus any paid-in capital (in for-
profits) less any payments that have been made to the organization’s
owners.

 In not-for-profit organizations, net worth is called “Net Assets” and is

broken down into three categories.
- Unrestricted Net Assets, which have not been restricted by
donors
(also cumulative profits appear here).
- Temporarily Restricted Net Assets, the use of which has been
restricted by donors.
- Permanently Restricted Net Assets, which are restricted in
perpetuity.
Balance Sheet with Net Asset Categories

ASSETS LIABILITIES AND NET ASSETS

Current Assets Liabilities

Cash $ 52,000 Current Liabilities

Accounts Receivable 18,000 Accounts Payable $ 7,000

Inventory 5,000 Wages Payable 30,000

Prepaid Insurance Total Current Liabilities $ 37,000

0
Total Current Assets $ 75,000 Long-Term Liabilities

Mortgage Payable $140,000

Long-Term Assets Total Long-Term Liabilities $140,000

Fixed Assets Total Liabilities $177,000

Property and Equipment-Net $240,000 Net Assets

Total Long-Term Assets $240,000 Unrestricted $113,000

Temporarily Restricted 15,000

Permanently Restricted 10,000

Total Net Assets $138,000

Total Assets $315,000 Total Liabilities and Net Assets $315,000

Building Financial Statements
 47

Example 1: Starting at the Beginning

Creating A Balance Sheet: Sample
Journal Entries
Date Account Names and Explanations Debit Credit
9/1 Cash 7500
Capital 7500
Owner contributes $7,500 in cash to capitalize the business
9/8 Bike Parts 2500
Accounts Payable 2500
Purchased $2,500 in bike parts on account, payable in 30 days
9/15 Expenses 1000
Cash 1000
Paid first month’s shop rent of $1000
9/17 Cash 400
Accounts Receivable 700
Revenue 1100
Repaired bikes for $1,100, collected $400 cash, billed customers for balance
Creating A Balance Sheet: Sample
Journal Entries
Date Account Names and Explanations Debit Credit
9/18 Expenses 275
Bike Parts 275
$275 in bike parts were used
9/25 Cash 425
Accounts Receivable 425
Collected $425 from customer accounts
9/25 Accounts Payable 500
Cash 500
Paid $500 to supplies for parts purchased earlier in the month
Moving from Journal Entries to a
General Ledger
• The general ledger is a collection of the firm’s
accounts.
• While the general journal is organized as a
chronological record of transactions, the ledger is
organized by account.
• In casual use the accounts of the general ledger often
take the form of simple two column T-accounts.
• In the formal records of the company they may
contain a third or fourth column to display the
account balance after each posting.
General Ledger
Cash Accounts Receivable
Sep 1 7500 Sep 15 1000 Sep 17 700 Sep 25 425
17 400 28 500
25 425

Bal 6825 Bal 275

Bike Parts Accounts Payable

Sep 8 2500 Sep 18 275 Sep 28 500 Sep 8 2500

Bal 2225 Bal 2000

Capital Revenue
Sep 1 7500 Sep 17 1100

Bal 7500 Bal 1100

Expenses
Sep 15 1000
18 275

Bal 1275
More About the General Ledger
• Note this direct mapping between the journal entries and the
ledger postings.
▫ While this posting of journalized transactions in the general
ledger at first may appear to be redundant since the
transactions are already recorded in the general journal, the
general ledger serves an important function: it allows one to
view the activity and balance of each account at a glance.
▫ Because the posting to the ledger is simply a rearrangement of
information requiring no additional decisions, it is easily
performed by software, either when the journal entry is made
or a batch process at the end of a specified time period.
• From these tools we can create a balance sheet and an
income statement
Sample Balance Sheet
Balance Sheet
As of Sept. 30, 20XX

Assets Liabilities and Owners Equity

Cash $ 6,825 Accounts Payable $ 2,000
Accounts Receivable $ 275
Bike Parts $ 2,225 Owners Equity* $ 7,325

Total Liabilities and

Total Assets $ 9,325 Owners Equity $ 9,325

* Owners Equity = Investment by Owner + Net Income

Sample Income Statement
Income Statement
From the Period Sept. 1 to Sept 30, 20XX

Revenue
Sales $ 1,100
Total Revenue $ 1,100

Expenses
Expenses $ 1,275
Total Expenses $ 1,275

Net Income $ (175)

 55

Example 2: Transactions Impacting

an Existing Balance Sheet
Transaction 1
 Suppose HOS buys inventory for $3,000. We could just add it to
assets. But, that puts the Fundamental Equation out of balance.
Assets = Liabilities + Net Assets
$3,000 = no change + no change
 We have not “paid” for the supplies. Suppose the seller sent
HOS a bill. We would record the full transaction as:
Assets = Liabilities + Net Assets
Inventory Accounts Payable
+ $3,000 = + $3,000 + no change
 To record a financial event, at least two elements of the
fundamental equation must change!
Transaction 2: A One-Sided Change Example
 Not every financial event (transaction) results in changes to
both sides of the fundamental equation. Suppose HOS paid
for the inventory in cash. Then the transaction would have
been recorded as follows:
Assets = Liabilities + Net Assets
Inventory Cash
+ $3,000 - $3,000 = no change + no change

 The fundamental equation is still in balance. But, all of the

changes occurred on the left side of the equation!
Transaction 3
 Suppose near the end of the year, HOS buys a one-year insurance
policy for $100 and pays for the policy in cash. Two things have
happened:
- Cash has gone down by $100.
- HOS owns a new $100 asset called “prepaid insurance”.
 Here’s the way the transaction would be recorded:
Assets = Liabilities + Net Assets

P/I Cash
+ $100 - $100 = no change + no change
Transaction 4

 HOS mails a check to its bedpan supplier for $2,000 to pay part
of the $7,000 it owed them at the start of the year. Two things
have happened:
- Cash has gone down by $2,000.
- HOS’s accounts payable have decreased by $2,000.

 Here’s the way the transaction would be recorded:

Assets = Liabilities + Net Assets

Cash = Accounts Payable

- $2,000 = - $2,000 + no change
Transaction 5: Collection Example
 HOS receives $12,000 from customers. This was owed to
HOS for care provided during the previous year.

- Cash has gone up by $12,000.

- HOS’s accounts receivable have decreased by $12,000.

 Here’s the way the transaction would be recorded:

Assets = Liabilities + Net Assets

Cash Accounts Receivable

+ $12,000 - $12,000 = No change on right side.
Transaction 6: A Nontransaction
 HOS signs a binding contract to buy an X-Ray machine that will
cost $50,000.

 This event will not give rise to a journal entry because it does not
meet the rules for recognition.
- The value of the transaction is known.
- The timing of the transaction is known.
- But, HOS does not yet own the equipment. There has been
no exchange! So HOS does not owe the money! No liability
is recorded unless we owe the creditor.
Generating a Balance Sheet: The Starting
Balance Sheet
ASSETS LIABILITIES AND NET ASSETS

Current Assets Liabilities

Cash $ 52,000 Current Liabilities

Accounts Receivable 18,000 Accounts Payable $ 7,000

Inventory 5,000 Wages Payable 30,000

Prepaid Insurance 0 Total Current Liabilities $ 37,000

Total Current Assets $ 75,000 Long-Term Liabilities

Mortgage Payable $140,000

Long-Term Assets Total Long-Term Liabilities $140,000

Fixed Assets Total Liabilities $177,000

Property and Equipment, Net $240,000

Total Long-Term Assets $240,000 Total Net Assets 138,000

Total Assets $315,000 Total Liabilities and Net Assets $315,000

 63

Generating a Balance Sheet:

Transactions Work Sheet
ASSETS LIABILITIES & NA

Accounts Ppd. Plant & Accounts Wages Mortgage Net

Cash Receivable Inventory Ins. Equipment Payable Payable Payable Assets

Beginning $52,000 $18,000 $5,000 $ 0 $240,000 $7,000 $30,000 $140,000 $138,000

Balance

Buy 3,000 3,000

Inventory

Pay for (100) 100

Fire Ins.
Pay for (2,000) (2,000)
Inventory

Receive
Payment 12,000 (12,000) _____ ____ _______ _____ ______ ______ ______

Ending $61,900 $ 6,000 $8,000 $100 $240,000 $8,000 $30,000 $140,000 $138,000
Balance
Generating a Balance Sheet: The Ending
Balance Sheet
ASSETS LIABILITIES AND NET ASSETS

Current Assets Liabilities

Cash $ 61,900 Current Liabilities

Accounts Receivable 6,000 Accounts Payable $ 8,000

Inventory 8,000 Wages Payable 30,000

Prepaid Insurance 100 Total Current Liabilities $ 38,000

Total Current Assets $ 76,000 Long-Term Liabilities

Mortgage Payable $140,000

Long-Term Assets Total Long-Term Liabilities $140,000

Fixed Assets Total Liabilities $178,000

Property and Equipment, Net $240,000

Total Long-Term Assets $240,000 Total Net Assets 138,000

Total Assets $316,000 Total Liabilities and Net Assets $316,000