Cash Basis Balance Sheet Basic Overview | John R. Dundon, EA
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Cash Basis Balance Sheet Basic Overview

cash basis balance sheet - woman writing in a spiral notebook

Cash Basis Balance Sheet Basic Overview

Having spent way too much time dissecting a balance sheet today I thought it might be a good idea to put out a cash basis balance sheet basic overview post.

What is a Balance Sheet?

A balance sheet is a snapshot at a specific point in time – usually the end of a quarter or fiscal year – that depicts the value of an entity’s assets as they relate to its liabilities and equity.  The basic formula or equation that needs to balance is:

ASSETS = LIABILITIES + OWNER’S EQUITY

I learned how to run a trial balance on a chart of accounts back in the ’80s at Marquette University and find myself to this day going back to the basic precept of ‘T’ accounts to untangle the most complicated balance sheets.  Leave it to the Jesuits to know their accounting.

In the ‘T’ accounts most primitive form, whenever a transaction is recorded 2 entries are made, one on the left side of the ‘T’ account and the other on the right side of a corresponding ‘T’ account.  This will be broken down further below but generally speaking, when it comes to cash basis balance sheets if a chart of accounts is set up with the general idea of ‘T’ accounts in mind then running a trial balance at the end of a period should be a breeze.

In my opinion, the basic rules of thumb for building or reconstructing a balance sheet are as follows:

  1. Analyze the financial event or transaction.
  2. Identify the accounts affected.
  3. Classify the accounts affected.
  4. Determine the amount of increase or decrease for each account.
  5. Apply the left-right rules for each account affected. Make the entry in T-account form.
  6. ‘T’ account names should ideally correspond to the line items listed on the balance sheet such as Cash, Prepaid Rent, Supplies, Account Payable and Equity,.

Again for a balance sheet to ‘balance’ as it were the value of the entity’s assets must equal the sum of its liabilities plus its owner’s equity.

Asset Accounts

Asset accounts show items of value owned by a business. For example, say you invested $100,000 in a corporation. That cash infusion is now an asset of the corporation. Cash increases appear on the left side of the Cash ‘T’ account, an asset account. Decreases are shown on the right side. The cash investment of $100,000 (a) is recorded on the left side of the Cash account.

Cash

+

(a) 100000

When you invested $100,000 in this corporation you become an owner or of the corporation. Owner’s equity appears on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). Increases in owner’s equity appear on the right side of the T account. Decreases in owner’s equity appear on the left side. In this case an investment of $100,000 (a) increases your capital account by $100,000 and is entered on the right side of the Capital account.

Shareholder ‘X’, Capital

+

(a) 100000

In this case, you invested $100,000 from your personal savings into the business checking account creating the following entries:

a. The asset account, Cash, is increased by $100,000.
a. The owner’s equity account is increased by $100,000.

Left-Right Rules for ‘T’ accounts

Again keeping in mind that the equation is basically:

Asset ‘T’ Accounts = Liability ‘T’ Accounts + Owner’s Equity ‘T’ Accounts

Left – Increases to asset accounts are recorded on the left side of the T account, decreases on the right.

Right – Increases to owner’s equity and liability accounts are recorded on the right side of the T account, decreases on the left.

Cash

+

(a) 100000

Shareholder ‘X’ Capital

+

(a) 100000

Recording an Asset Acquisition

The business issued a $5,000 check to purchase a computer and other equipment.

b. The asset account, Equipment, is increased by $5,000.
b. The asset account, Cash, is decreased by $5,000.

Equipment

+

(b) 5000

Cash

+

(a) 100000 (b) 5000

Recording an asset purchase using credit

Liabilities are amounts a business owes its creditors. Liabilities appear on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). Increases in liabilities are on the right side of liability T accounts. Decreases in liabilities are on the left side of liability T accounts. For this example let’s say the business bought office equipment for $6,000 on account from Office Plus.

c. The asset account, Equipment, is increased by $6,000.
c. The liability account, Accounts Payable, is increased by $6,000.

Equipment

+

(b) 5000
(c) 6000

Accounts Payable

+

(c) 6000

Purchasing Supplies with Cash

The business issued a check for $1,500 to North Shore Office Supply, Inc to purchase office supplies.

a. The asset account, Supplies, is increased by $1,500.
b. The asset account, Cash, is decreased by $1,500.

Supplies

+

(d) 1500

Cash

+

(a) 100000 (b) 5000
(d) 1500

Notice that the Cash account now shows three transactions: the initial investment by the owner (a), the cash purchase of equipment (b), and the cash purchase of supplies (d).

Recording Payment to a Creditor

The business paid $2,500 to North Shore Office Supply to apply against the debt of $6,000 shown in Accounts Payable.

a. The asset account, Cash, is decreased by $2,500.
b. The liability account, Accounts Payable, is decreased by $2,500.

Accounts Payable

+

(e) 2500 (c) 6000

Cash

+

(a) 100000 (b) 5000
(d) 1500
(e) 2500

Recording Pre-Paid Rent

The business was required to pay rent in advance. You set up an asset account called Prepaid Rent.

a. The asset account, Prepaid Rent, is increased by $8,000.
b. The asset account, Cash, is decreased by $8,000.

Prepaid Rent

+

(f) 8000

Cash

+

(a) 100000 (b) 5000
(d) 1500
(e) 2500
(f) 8000

Account Balances

An account balance is the difference between the amounts on the two sides of the ‘T’ account. First, add the figures on each side of the ‘T’ account. Then subtract the smaller total from the larger total with the result being the account balance. If the total on the right side is larger than the total on the left then the balance is recorded on the right side. If the total on the left side is larger, the balance is recorded on the left side. This is true even if there is only one entry.

Your Successful Business

Balance Sheet

December 31, 2020

Assets Liabilities
Cash

83000

Accounts Payable

3500

Supplies

1500

Prepaid Rent

8000

Owner’s Equity
Equipment

11000

Carolyn Wells, Capital

100000

Total Assets

103500

Total Liabilities and Owner’s Equity

103500

 

Photo by Sarah Shaffer on Unsplash (4/12/2021)



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