In this lesson we are changing the following step in
the accounting cycle:
Thus far we have used a balance sheet that is arranged
in the same fashion as the accounting equation – that is, Assets on
the left, Liabilities and Equity on the right, just like the one shown below.
Our needs however, have surpassed this simple format.
There are three major reasons:
We have several contra-accounts that we need to
show and sub-total on the balance sheet. This requires a balance sheet
with multiple columns
As we begin to require more specific information
for analysis and reporting, we need to categorize, and classify certain
accounts into particular groups.
Lastly, we can’t balance anymore using
the old method! Remember the “Capital” account is the balance
from the beginning of the period. All changes to Owner’s Equity
have been channelled into the Drawings, Revenue, and Expense accounts
and thus are missing from Capital. (If you recall, this
is why we had to transfer the net income number on the worksheet at
the bottom click here
to review).
Though you may be aware of the classification of short-term
and long-term assets and liabilities, now we physically show them as separate
on the Balance Sheet. The presentation breaks down as follows:
Now that you know classification and column use, we
will begin to construct a New Classified
Balance Sheet section by section before we cover item 4, which is the
equity section.
The first section is Assets. Remember this is divided
into short-term and long-term assets. Short term assets are called Current
Assets. We have one contra
account to deal with here; it is the Allowance for doubtful accounts
Soon you will have to perform financial analysis on
the Balance Sheets and Income Statements of companies.
By classifying the accounts on a Balance Sheet, this
analysis becomes much, much easier. It will allow you to quickly find and
calculate numbers that you will require.
Click on the arrows in the middle of the Balance Sheet
we just finished below to see how:
