Basic Accounting
Concepts: The
Balance Sheet
Part One: Financial Accounting
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Basic Concepts
• Money
•
•
•
•
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measurement
Entity
Going concern
Cost
Dual aspect
Slide 2-1
• Accounting
period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
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The Entity Concept
Slide 2-2
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?
Owner
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The Entity Concept
Slide 2-3
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.
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The Going -Concern Concept
Slide 2-4
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?
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The Going -Concern Concept
Slide 2-5
Because of the going-concern
concept, the firm would not value
the jeans at what they are currently
worth--the liquidation value.
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The Cost Concept--Nonmonetary Assets
Slide 2-6
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?
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The Cost Concept--Nonmonetary Assets
Slide 2-7
The land should be shown at the original purchase price of
$250,000 because of the cost concept.
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The Cost Concept--Monetary Assets
Slide 2-8
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?
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The Cost Concept--Monetary Assets
Slide 2-9
The fair value of the stocks is $6,500,000.
This is the amount that should be shown for this monetary asset.
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The Dual-Aspect Concept
Slide 2-10
Assets = Equities
Assets = Liabilities + Owners’ equity
+ $40,000 =
+ $40,000
Ms. Jones opens a bank account for
the business by depositing $40,000.
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The Dual-Aspect Concept
Slide 2-11
Assets = Liabilities + Owners’ equity
+ $40,000 =
+ 15,000
$40,000
+ 15,000
The business borrows
$15,000 from the bank.
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The Dual-Aspect Concept
Slide 2-12
Assets = Liabilities + Owners’ equity
+ $40,000 =
$40,000
+ 15,000
+ 15,000
$55,000
$15,000
$40,000
Assets = Equities
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The Balance Sheet--The Heading
Slide 2-13
GARSDEN CORPORATION Name of entity
Balance Sheet
As of December 31, 1998
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Name of statement
Moment of time
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The Balance Sheet--Assets
Slide 2-14
Current assets:
Cash
$ 3,448,891
Marketable securities
246,221
Accounts receivable
5,954,588
Inventories
12,623,412
Prepaid expenses
377,960
Total current assets
Property, plant, and equipment:
Land
Building and equipment, at cost
26,303,481
Less: accumulated depreciation 13,534,069
Other assets:
Investments
110,000
Intangible assets
63,214
Total assets
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$22,651,072
642,367
12,769,412
173,214
$36,236,065
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The Balance Sheet--Liabilities
and Shareholders’ Equity
Slide 2-15
Current liabilities:
Accounts payable
$ 6,301,442
Taxes payable
1,672,000
Accrued expenses
640,407
Deferred revenues
205,240
Current portion of long-term debt
300,000
Total current liabilities
$ 9,119,089
Long-term debt
3,000,000
Total liabilities
12,119,089
Shareholders’ equity:
Paid-in capital
5,000,000
Retained earnings
19,116,976
Total shareholders’ equity
24,116,976
Total liabilities and shareholders’ equity
$36,236,065
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Account Categories--Current Assets
Slide 2-16
 Cash
Funds that are readily available for
distribution
 Marketable securities
Investments that are both readily marketable
and expected to be converted into cash
withinone year
 Accounts receivable
Amounts owed to the entity by its customers
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Account Categories--Current Assets
Slide 2-17
Inventories
Aggregate of items either held for sale
in the ordinary course of the business, in
process of production for such sale, or
soon to be consumed in production
Prepaid expenses
Assets, usually of an intangible nature,
whose usefulness will expire in the near
future
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Account Categories--Current Liabilities
Slide 2-18
Accounts payable
Claims of suppliers arising from their
furnishing goods or services to the
entity for which they have not been paid
Taxes payable
Amount the entity owes governmental
agencies
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Account Categories--Current Liabilities
Slide 2-19
Accrued expenses
Amounts earned by outside parties but
have not been paid by the entity
Deferred revenues
Liabilities that arise because the entity
receives advanced payments for services
the entity has agreed to render in the
future
Current portion of long-term debt
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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.
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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.
MUSIC MART
Balance Sheet
As of January 1
Assets
Cash
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Liabilities and Owners’ Equity
$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.
MUSIC MART
Balance Sheet
As of January 1
Assets
Cash
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Liabilities and Owners’ Equity
$25,000 Paid-in capital
$25,000
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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.
MUSIC MART
Balance Sheet
As of January 1
Assets
Cash
Total
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Liabilities and Owners’ Equity
$37,500 Notes payable
Paid-in capital
$37,500 Total
$12,500
25,000
$37,500
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Music Mart
Slide 2-24
On January 3, the business buys inventory in the amount of
$5,000, paying cash.
MUSIC MART
Balance Sheet
As of January 1
Assets
Cash
Inventory
Total
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Liabilities and Owners’ Equity
$32,500 Notes payable
5,000 Paid-in capital
$37,500 Total
$12,500
25,000
$37,500
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Music Mart
Slide 2-25
On January 4, the business sells merchandise that cost $500
for $750. Cash was received.
MUSIC MART
Balance Sheet
As of January 1
Assets
Cash
Inventory
Total
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Liabilities and Owners’ Equity
$33,250 Notes payable
4,500 Paid-in capital
Retained earnings
$37,750 Total
$12,500
25,000
250
$37,750
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Chapter 2
The End
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