The Balance Sheet

 

As discussed in my earlier posts, the balance sheet shows the financial position of an entity. In addition to the example introduced earlier whereby the owner contributed $10,000 cash at bank as capital (please refer to my post titled Debits and Credits), there are many more examples of transactions that have an impact on the balance sheet, i.e. they would change the items and figures reflected in the balance sheet. Some of the examples are as follows:-

1. Purchase of asset using cash at bank (by way of issuing cheque)

Using the example of ABC Limited in which the owner have contributed $10,000 cash at bank as capital, assume the owner decided to use part of the money to purchase an asset e.g. a computer desk costing $500, the double entry would be as follow:-

Dr. Computer desk                                $500

Cr. Cash at bank                                             $500

After the transaction has been effected, the balance sheet of ABC Co. Limited would show:-

ABC Co. Limited

Balance Sheet as at 31 December 2006

 

$

Assets

 

Computer desk

500

Cash at bank

9,500

Liabilities

TOTAL

10,000

Owners’ Equity

 

Paid-up share capital

10,000

TOTAL

10,000

 

As you can see here, $500 cash at bank used to purchase the computer desk is now recorded as a new asset item called “Computer desk” and as a result, the money left in the bank has reduced from $10,000 to $9,500. Take note that this transaction has NO EFFECT on the Owners’ Equity nor its Liabilities. In other words this is a transaction that affects the assets of ABC Co. Limited.

2. Purchase of asset under credit

Refer to the example of ABC Co. Ltd again, assume this time instead of purchasing the $500 computer desk using the money in the bank, the Owner of ABC Co. Ltd purchased it under credit, i.e. ABC Co. Ltd owes the creditor (Mr X, the computer desk vendor) $500 until it is paid. The double entry would be as follow:-

Dr. Computer desk                                $500

Cr. Creditor-Mr X                                   $500

After the transaction is effected, the balance sheet would show:-

ABC Co. Limited

Balance Sheet as at 31 December 2006

 

$

Assets

 

Computer desk

500

Cash at bank

10,000

 

10,500

Liabilities

 

Creditor-Mr X

(500)

TOTAL (Assets – Liabilities)

10,000

Owners’ Equity

 

Paid-up share capital

10,000

TOTAL

10,000

 

Same as Example 1, a new asset, “Computer desk” is created. In addition, a new liability item, “Creditor-Mr X” is also created. Again this is a transaction that has NO EFFECT on Owners’ Equity. However, it is a transaction that has an effect on Asset (Computer desk) and Liability (Creditor-Mr X).

Please take note that not all transactions affect only the Balance Sheet, there are transactions that have their effect on the Income Statement or Profit and Loss Account as well which I will discuss in later topics.

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