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Lesson 1: Introduction to Financial Statements

The Balance Sheet | Video

Read Chapter 1, pp. 5–8 and Chapter 2, pp. 47–top of 50 and 68–73.

Robyn's Retail is a legal entity separate and apart from its owners. Once the owners invested $50,000, the money becomes a resource, or capital, and will be used by the company. Likewise, it's the company that will earn money using its resources. The financial information gathered and summarized for a company has the characteristics outlined in the FASB conceptual framework and can be summarized and presented using the four basic financial statements. First, we will consider the balance sheet.

The balance sheet contains information about a company’s financial position at a point in time—often the end of a year, quarter, or month. It's divided into three major sections, representing three of the elements in the conceptual framework:

  • Assets: Probable future economic benefits owned by the entity as a result of past transactions. After the initial investment and purchases, Robyn's has cash, accounts receivable, inventory, prepaid rent, prepaid insurance, supplies, land, furniture and fixtures, and equipment. These assets represent resources that will benefit the company in the future.
  • Liabilities: Probable future sacrifices of economic benefits arising from a present obligation to transfer cash, goods, or services as a result of a past transaction. Robyn's has obligation to pay suppliers reflected in accounts payable and the bank, in the long-term notes payable.
  • Equity: The financing provided by owners and operations of the business. Owners provided $50,000 of financing or contributed capital, and Robyn's generated income in September of $1,292 retained in the business. We will see this in the income statement presented in the next section.
Table 1.2. Robyn's Retail Balance Sheet at September 30
Robyn's Retail
Balance Sheet
September 30, 20xx
 
Current Assets     Current Liabilities  
Cash $     28,150   Accounts Payable $     5,250
Accounts Receivable 800   Unearned Revenue 100
Inventory 10,000   Interest Payable           50
Prepaid Rent 8,800   Total Current Liabs.      5,400
Prepaid Insurance 550      
Supplies             500   Long-Term Liabs.  
Total Current Assets        48,800   Note Payable        20,000
Non-Current Assets     Total LT Liabs.        20,000
Land 20,000   Total Liabilities        25,400
Furniture & Fixtures 3,000      
Equipment 5,000   Stockholders' Equity  
Accum. Depreciation           (108)   Common Stock 50,000
Net PP&E        27,892   Retained Earnings          1,292
                       Total SE        51,292
Total Assets $     76,692   Total Liabs. & SE $     76,692

Please watch to learn more about the balance sheet for Robyn's Retail.

Note: Video removed. You will have access to the video in the actual course.

In the balance sheet, assets must always balance with, or equal, liabilities and equity. The relationship can be written as an equation (Figure 1.1).

Assets = Liabilities + Equity, Assets: resources that will benefit the company in the future, Liabilities: obligations of the company, Equity: financing provided by owners, plus earnings of the company
Figure 1.1. The Accounting Equation

This relationship is called the accounting equation. Later, you will learn how the accounting system records transactions to always keep the accounting equation—and the balance sheet—in balance. For now, it's important to be able to identify specific business items as assets, liabilities, or equity items. Select Next at the bottom of the page for a practice exercise.


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