MSE608C – Engineering and Financial
Cost Analysis
The Balance Sheet and
Double-Entry Bookkeeping
Assets on the Balance Sheet
• Current Assets are “used up”, “expended” or converted
into cash within 12 months
• Some expenses are Prepaid in advance. These become an
ASSET
Assets on the Balance Sheet
• Non-current Assets are “used up” or “expended”
in a period longer than 12 months
• Non-current Assets do not have a category title,
they are just listed after Current Assets
Liabilities on the Balance Sheet
• Current Liabilities are “discharged” or “paid off” within 12 months.
Owners’ Equity on the Balance
Sheet
• Owners’ Equity is the difference between Assets and Liabilities.
– The value remaining in the company for the owners.
– Not a pool of cash
– Revenues increase Owners’ Equity; Expenses decrease it.
• Invested Capital = Voluntary investment of funds
• Retained Earnings = residual value from profit-seeking activities
• Retained Earnings help the business to grow
Double-entry Bookkeeping
• Newton’ Third Law of Motion
For every action there is an equal and opposite
reaction
• Accounting rules
For every Debit there is an equal and opposite
Credit recorded in the accounting records
Double-entry Bookkeeping
• Double-entry bookkeeping is the accepted accounting
mechanism for recording and classifying the monetary
events of a business entity
• The T-account format:
Title and Account #
+ Debit side + Credit side
• For every monetary event there is at least one entry on the
debit side of at least one account and the credit side of
another account.
Double-entry Bookkeeping
A = L + OE
Asset
+
Owners’ Equity
Liabilities
=
-
+
+
-
+
Account Type
Assets
Liabilities
+ Debit Effect
Increase
Decrease
+ Credit Effect
Decrease
Increase
Owners’ Equity
Decrease
Increase
Chart of Accounts
The Journal
The Ledger
The Cycle at Work
Assessment
• Owner’s Equity is comprised of what two
components?
• What is the basic “law” of double-entry
bookkeeping?
• What are the first stages of the Accounting
Cycle?