Helpful Hints

Balance Sheet:

Assets: Valuable items used by the company which may be of short term and long term value. Long term assets are something of value that the company uses for generally more than one year, and not “consumed” fairly quickly.

Short term assets might include things such as cash, receivables, and inventory. The key thing to recall is these items have not been “sold” to customers or others *yet* (they may be sold later, but not yet).

Think of it like you buying a car- it is an asset, but someday you may sell it or trade it in. The money you receive from your job and what’s in your checking account is an asset, but it obviously is varying in amount.

Maybe we sold something on credit to a customer- that is a receivable.

Inventory is materials or goods we expect to sell shortly to someone- think of Foley’s merchandise when you go into their store- that is inventory to them. They had to expend their own resources to acquire the inventory before we, the customer, buy the merchandise from them.

Equipment can be computers, display bins, etc.

Property plant and equipment are things such as the building, cars, land, etc. Notice that to acquire an asset you usually had to give up or use something, such as executing a note to help pay for a new vehicle, or using cash to buy inventory.

Examples: Cash, Receivables, Inventory, Equipment, Property Plant Equipment

NOTICE in no fashion do you see the word “expense” or “revenue” or “income” (except for very limited exceptions which we will deal with later) in a balance sheet, they belong in the INCOME STATEMENT.

Liabilities: Something that must be repaid generally for services or products provided already to the company usually on credit. For example, accounts payable – where a company has bought either inventory or assets on credit and must be paid in a short time.

Also, notes payable represent funds borrowed from a lending institution or some other source, usually payable after 90 days or longer. For example, when you buy something on credit at a store, that is similar to an accounts payable, as it must be paid within a certain time frame.

If you get cash from a loan for college, that is a long term liability and you don’t pay it back for several years. Also notice that generally, but not always, that a liability’s account name includes the word “x payable”.

Examples: Interest payable, wages payable, accounts payable, notes payable.

Owners Equity: what the owners of the company have invested in the company, such as what they paid for the initial stock and the resulting built up (nondistributed) profit (retained earnings) less any dividends paid.

Owner’s equity usually has capital stock in some variation. Net retained earnings are also part of the owner’s equity “equation.”

Dividends are usually cash payments to the owners that represent a permanent decrease in assets to the company, which are in essence assets (here cash) transferred to the owners.

Accounting Equation: Assets = Liabilities + Owners Equity

Income Statement:

Revenues: what the company has sold to others in products (for example, Foley’s) or in services (like a plumber or an accountant)

Expenses: the “matching up” of cost of the products and services. This may not be a “precise” science.

Examples: Revenues: Sales Revenue, Service Revenue, etc (the price you get for selling something to someone). Notice that the income statement will record the income, which might be variously called Service Income, Service Revenue, Sales Income, Sales Revenue, Interest Income, etc. Revenue goes ONLY to the income statement!

Expenses: Salary expense, repair expense, interest expense, cost of goods sold (while this one doesn’t say expense, memorize the fact this is truly an expense!), utility expense, postage expense, etc. (the cost of the product or service directly related to the revenue)

Big hint: notice that most expenses that are associated with an income statement end with the term “expense”. For example, payroll expense. Expenses go ONLY to the income statement! And usually the revenue accounts include the word “revenue” “income” or “sales”.