What is a Balance Sheet? Balance sheet is a sheet that is
balance. The balance sheet is always balance. That is Assets = Liabilities + Equity.
What you can see in the Balance Sheet are balances of your assets and sources
of your capital. It is a summary of balances, hence the Balance Sheet.
Before you proceed further, it is necessary to read my
previous blog so that you’ll have an understanding of the reports presented
below. Here it is Juan DelaCruz Sari-Sari Store.
Let’s take the trial balance we have
in the previous blog.
JUAN DELA CRUZ SARI-
SARI STORE
TRIAL BALANCE
AS OF OCTOBER 31, 2013
(In Philippine Peso)
Account
Titles Debit
Credit
Cash 15,000
Inventory 15,500
Store Building 20,000
Accumulated Depreciation 167
Owner’s Equity 50,000
Sales 5,000
Cost of Goods Sold 4,500
Depreciation Expense 167
Total 55,167 55,167
Based on the above trial balance, we will generate the
balance sheet. Let’s begin with Current Assets. Current Assets are assets which
are current. They are expected to be sold or used within one year.
Cash and Inventories are classified as current because
they are expected to be used or sold within one year. Structure of Current Assets in the Balance Sheet is shown below.
However, there are businesses whose operating cycle is
greater than one year. An operating cycle is the length between paying employee
salaries or buying materials and collecting cash from customers. A shipbuilder
building a ship tanker takes more than two years to finish and deliver the ship
to customer. Thus, the operating cycle of a shipbuilder is not one year but
rather more than two years.
Let’s move to Non-Current Assets. Non-Current Assets are
assets which are not current. They are not
expected to be sold or used within one year.
Store Building is classified as non-current because it is
expected to be used for more than one year. In fact, you estimated it to last
for ten years. Thus, the economic benefits the store building will bring is
more than one year, hence it is treated as non-current assets. The store
building cost 20,000. This 20,000 cost should be allocated or spread out for
ten years, its estimated useful life. Using straight line method, monthly depreciation
is Php 167 (20,000÷120 months). Below is the structure for Non-Current Assets.
Owner’s Equity
Next is the Liabilities and Owner’s Equity. Since, there are
no liabilities in our example, we’ll ignore that for the meantime. We’ll go on
to the Owner’s Equity Account. The Owner’s Equity’s balance in the trial
balance is 50,000.
Closing (Consolidate) the Income Statement Accounts
to Income Summary Account
Sales, Cost of Goods and Depreciation Expense accounts
are not Balance Sheet accounts. They are Income Statement Accounts. They do not
appear in the Balance Sheet. In order to transfer these account balances, we
must create closing entries. Closing entries are:
|
Date
|
Account Title
|
Debit
|
Credit
|
|
31-Oct-13
|
Income Summary
|
333
|
|
|
31-Oct-13
|
Sales
|
5,000
|
|
|
31-Oct-13
|
Cost of Goods Sold
|
|
4,500
|
|
31-Oct-13
|
Depreciation Expense
|
|
167
|
|
|
To close the income
statement accounts to Income Summary
|
||
What have you noticed? First, Sales which has a credit
balance in the trial balance was debited in the closing entry so its balance is
now zero. Cost of goods sold and depreciation expense were credited in the
closing entry, their balances are now zero. What happened is that we closed the
income statement accounts and created a “profit and loss” account which in this
case is the Income Summary account. The income summary account is the profit of
the store for the period of October 2013. Its balance of 333 is the profit of
the store.
Transferring Net Income to Balance Sheet
This Income Summary account is still an Income Statement
account. What we did was to consolidate all the Income Statement accounts into
one summary account.
This Income Summary account which in reality is profit of
the store for October 2013 can now be transfer to Owner’s Equity. The entry is:
|
Date
|
Account Title
|
Debit
|
Credit
|
|
31-Oct-13
|
Income Summary
|
333
|
|
|
31-Oct-13
|
Owner’s Equity
|
333
|
|
|
|
To close the income summary
account tp Owner’s Equity
|
||
The Income statement account balances are all zero at
this point in time after considering the closing entries. Let’s take a look at
the trial balance after the closing entries.
JUAN DELA CRUZ SARI-
SARI STORE
TRIAL BALANCE
AS OF OCTOBER 31, 2013
(In Philippine Peso)
Account
Titles Debit
Credit
Cash 15,000
Inventory 15,500
Store Building 20,000
Accumulated Depreciation 167
Owner’s Equity 50,333
Total 50,500 50,500
If you noticed, there are no more Income Statement
Accounts. The remaining accounts are all balance sheet accounts. From this, we
can proceed in generating the Balance Sheet of Juan Dela Cruz Sari Sari Store.
