1. Reporting Investing and Financing Results on the Balance Sheet
Chapter 2
Reporting Investing and Financing Results on the Balance Sheet
Chapter 2 Reporting Investing and Financing Results on the Balance Sheet

2. All businesses—big and small—need systems for organizing information.
Supercut’s Situation
All businesses—big and small—need systems for organizing information.
In this chapter, we will focus on the decisions that business managers make when starting up a single Supercuts salon and how their accounting systems track the financial results of the salon’s investing and financing activities.
All businesses—big and small—need systems for organizing information.
In this chapter, we will focus on the decisions that business managers make when starting up a single Supercuts salon and how their accounting systems track the financial results of the salon’s investing and financing activities.

3. The Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
Remember the basic accounting equation from chapter 1?
In this chapter we will focus on how business activities affect this equation.
Do you remember the basic accounting equation from chapter 1? It is assets equal liabilities plus stockholders’ equity. In this chapter, we will focus on how business activities affect this equation.

4. Explain and select common balance sheet account titles.
Learning Objective 1
Explain and select common balance sheet account titles.
Learning objective number 1 is to explain and select common balance sheet account titles.

5. Business Activities and Balance Sheet Accounts
Let’s think about what’s involved in getting your Supercuts hair salon up and running:
Select a rental location
Renovate the space
Buy furniture and salon equipment
Buy a computer and software
Buy shampoos and the like
You and your parents only have $50,000 to contribute to these start-up costs. You determined that a $20,000 loan from a bank would provide enough cash to cover the rest of the costs.
What accounts do you think would likely appear on the balance sheet of your Supercuts store?
Part I
First, let’s think about all the activities involved in starting your Supercuts hair salon. You will select a rental location, renovate the space, buy furniture and salon equipment, buy a computer and software, and buy shampoos and the like.
Part II
You and your parents only have fifty thousand dollars to contribute to these start-up costs. You determined that a twenty thousand dollar loan from a bank would provide enough cash to cover the rest of the costs.
Take a minute and see what accounts you think would likely appear on the balance sheet of your Supercuts store. When you are ready, let’s take a look at the next slide and see how you did.

6. Business Activities and Balance Sheet Accounts
Well, how did you do? Your Supercuts store balance sheet would have Cash, Supplies, Equipment, Accounts Payable, Notes Payable, Contributed Capital and Retained Earnings.
The most important thing at this stage is that you knew to think about assets, liabilities, and stockholders’ equity accounts. One thing to know about balance sheet accounts is that assets are listed in order of how fast they will be used up or can be turned into cash. Assets have three features: (1) it is probable that they will generate future economic benefits for the company, (2) the company can obtain these benefits and control others’ access to them, and (3) these benefits arise from having acquired the assets in the past.
There are three thing for you to notice in the bottom half of the balance sheet. First, liabilities are listed in the order of how soon they are expected to be paid, satisfied, or fulfilled. Second, all liabilities share the common features that they are unavoidable obligations, requiring a future sacrifice of resources, arising from a past transaction or event. Third, the stockholders’ equity section contains two accounts. Contributed capital shows the amount of financing contributed to the company by stockholders, and retained earnings indicates the total earnings of the business that has been retained in the company as of the balance sheet date.
We will talk later about the details of classifying accounts on the balance sheet as current and noncurrent.
Take a minute and review the explanation of the items included on this balance sheet.

7. Sample Chart of Accounts
The chart of accounts is a summary of all account names (and corresponding account numbers) used to record financial results in the accounting system.
A summary of account names and corresponding account numbers is called a chart of accounts. Each company keeps a chart of accounts to ensure consistency in reporting its own financial results. Don’t try to memorize the chart of accounts. It is provided merely as a learning tool for you to see many of the common account titles you will be using in this class.
Let’s look at the description of each of these accounts on the next slide.
The next slide provides a description of each account listed.

8. Wow. That is a lot of words
Wow! That is a lot of words. And these are just accounts used on the balance sheet. Asset accounts are in the green section. Liability accounts are in the yellow section. And, Stockholders’ Equity accounts are in the blue section.
Take a few minutes to review this slide and see if the account descriptions make sense to you.

9. Apply transaction analysis to business transactions.
Learning Objective 2
Apply transaction analysis to business transactions.
Learning objective number 2 is to apply transaction analysis to business transactions.

10. The Accounting Cycle (1) Analyze (2) Record (3) Summarize
The accounting cycle is the process used for analyzing, recording, and summarizing the financial effects of business activities. Learning how the accounting cycle works is a key part of this chapter and is crucial to understanding the rest of the course. So, take your time as we go through the following sections.

11. Step 1: Analyze
A transaction is an exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders’ equity of a business.
Transaction
A transaction is an exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders’ equity of a business. Business activities that do not have direct or measurable financial effects on the company are not recorded in the accounting system. For example, if someone at Supercuts answers the phone, there is no immediate financial impact so this activity would not be recorded. Activities like cutting hair and buying hair dryers have a direct financial impact, so they are considered transactions and will be recorded.

12. Step 1: Analyze
External Exchanges
Exchanges involving assets, liabilities, and stockholders’ equity that you can see between the company and someone else.
Internal Events
Events occurring within the company, for example, using some assets to create an inventory product.
Part I
How do you know if a business activity is considered an accounting transaction? Look for two types of events, both of which are considered accounting transactions:
External exchanges involve exchanges in assets, liabilities, and stockholders’ equity that you can see between the company and someone else. For example, when Starbucks sells you a Frappucino ®, it is exchanging an icy taste of heaven for your cash, so Starbucks would record this in its accounting system.
Part II
Internal events occur within the company, for example, using some assets to create an inventory product.
One word of warning: not all external exchanges and internal events are considered transactions. If an exchange or event does not have a direct financial impact on the basic accounting equation when it occurs, it is not considered a transaction. So, when Supercuts orders supplies to be delivered in the future, no exchange of assets or services has occurred yet. There has only been a promise to pay after the supplies are delivered.

13. Two simple ideas are used when analyzing transactions:
Transaction Analysis
Two simple ideas are used when analyzing transactions:
Duality of Effects
Every transaction has at least two effects on the basic accounting equation.
A = L+ SE
Remember that assets must equal liabilities plus stockholders’ equity for every accounting transaction.
When analyzing transactions, two simple ideas are used. The first idea is the duality of effects and the second is the basic accounting equation.
Duality of effects means that every transaction has a least two effects on the basic accounting equation.
At the same time, remember that assets must equal liabilities plus stockholders’ equity for every accounting transaction.
Let’s look at some examples and see how this works.
Assets = Liabilities + Stockholders' Equity

14. Transaction Analysis—Examples
Pay cash for hair spray supplies.
A = L+ SE
Cash (an asset) decreases.
Supplies (an asset) increases.
Duality of Effects
Supercuts gives Cash.
Supercuts receives Supplies.
Part I
Supercuts pays cash for hair spray supplies.
Part II
The duality of effects involve Supercuts giving Cash and taking Supplies.
Part III
For this transaction, Cash, an asset, decreases and Supplies, an asset, increases. The basic accounting equation is in balance because the same amount was subtracted from one asset account, Cash, and added to another asset account, Supplies.

15. Transaction Analysis—Examples
Buy hair supplies on credit.
A = L+ SE
Accounts Payable (a liability) increases.
Supplies (an asset) increases.
Duality of Effects
Supercuts gives Accounts Payable.
Supercuts receives Supplies.
Part I
Next, assume Supercuts buys hair supplies on credit.
Part II
The duality of effects involve Supercuts giving an Accounts Payable and taking Supplies.
Part III
For this transaction, Accounts Payable, a liability, increases and Supplies, an asset, increases. The basic accounting equation is in balance because the same amount was added to a liability account, Accounts Payable, and to an asset account, Supplies.

16. Transaction Analysis—Examples
Pay cash for amount owed.
A = L+ SE
Cash (an asset) decreases.
Accounts Payable (a liability) decreases.
Duality of Effects
Supercuts gives Cash.
Supercuts eliminates Accounts Payable.
Part I
Next, assume Supercuts pays cash for the amount owed on accounts payable.
Part II
The duality of effects involve Supercuts giving Cash and eliminating their Accounts Payable.
Part III
For this transaction, Cash, an asset account, decreases and Accounts Payable, a liability, decreases. The basic accounting equation is in balance because the same amount was subtracted from an asset account, Cash, and from a liability account, Accounts Payable.

17. DECIDE: An Approach to Analyzing Transactions
Part I
The DECIDE method is a systematic approach to use when analyzing transactions. Just follow these steps to DECIDE on the accounting effects.
First, detect if a transaction exist. If so, go to step two.
Second, examine the transaction for the accounts affected.
Third, classify each account as an asset, liability, or stockholders’ equity.
Fourth, identify the financial effects.
And, finally, fifth, end with the effects on the basic accounting equation, ensuring that it still balances.
Part II
Let’s work through a few examples using the DECIDE approach.
Let’s work through a few examples using the DECIDE approach.

18. Take a minute and think about these steps.
You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account.
Assume you incorporate your Supercuts salon on August 1st. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account. Take a minute and think about each of these steps.
Take a minute and think about these steps.

19. You incorporate your Supercuts salon on August 1
You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account.
As you can see, a transaction does exist because cash is received and stock is given. The accounts affected are Cash and Contributed Capital. Cash is an asset account and Contributed Capital is a stockholders’ equity account. Cash increases $50,000 and Contributed Capital increases $50,000. As you can see, Cash, an asset account, increases $50,000 and Contributed Capital, a stockholders’ equity account, increases $50,000. The basic accounting equation still balances.

20. Your salon pays $42,000 cash for equipment.
Assume your salon pays $42,000 cash for equipment. Take a minute and think about each of these steps.
Take a minute and think about these steps.

21. Your salon pays $42,000 cash for equipment.
A transaction does exist because equipment has been received and cash is given. The accounts affected are Cash and Equipment. Cash is an asset account and Equipment is an asset account. Cash decreases $42,000 and Equipment increases $42,000. As you can see, the asset account Cash decreases $42,000 and the asset account Equipment increases $42,000. The basic accounting equation still balances.

22. Take a minute and think about these steps.
Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.
Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years. Take a minute and think about each of these steps.
Take a minute and think about these steps.

23. Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.
A transaction does exist because cash is received and a formal promise to pay is given. The accounts affected are Cash and Notes Payable. Cash is an asset account and Notes Payable is a liability. Cash increases $20,000 and Notes Payable increases $20,000. As you can see, the asset account Cash increases $20,000 and the liability account Notes Payable increases $20,000. The basic accounting equation still balances.

24. Take a minute and think about these steps.
Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month.
Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month. Take a minute and think about each of these steps.
Take a minute and think about these steps.

25. Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month.
A transaction does exist because equipment is received, cash is given, and an informal promise to pay is given. The accounts affected are Equipment, Cash and Accounts Payable. Equipment is an asset, Cash is an asset and Accounts Payable is a liability. Equipment increases $18,000, Cash decreases $16,000 and Accounts Payable increases $2,000. As you can see, the asset account Equipment increases $18,000 and the asset account Cash decreases $16,000 for a net increase in assets of $2,000 which equals the increase in the liability account Accounts Payable of $2,000. The basic accounting equation still balances.

26. Take a minute and think about these steps.
Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet.
Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet. Take a minute and think about each of these steps.
Take a minute and think about these steps.

27. Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet.
This is not a transaction because nothing has been received and only a promise has been given.
Did you get this one?

28. Your company pays the $2,000 owed to the equipment supplier in (d).
Your company pays the $2,000 owed to the equipment supplier in (d). Take a minute and think about each of these steps.
Take a minute and think about these steps.

29. Your company pays the $2,000 owed to the equipment supplier in (d).
A transaction does exist because cash is given and an informal promise to pay is eliminated. The accounts affected are Cash and Accounts Payable. Cash is an asset and Accounts Payable is a liability. Cash decreases $2,000 and Accounts Payable decreases $2,000. As you can see, the asset account Cash decreases $2,000 and the liability account Accounts Payable decreases $2,000. The basic accounting equation still balances.

30. Take a minute and think about these steps.
Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month.
Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month. Take a minute and think about each of these steps.
Take a minute and think about these steps.

31. Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month.
A transaction does exist because supplies are received and an informal promise to pay is given. The accounts affected are Supplies and Accounts Payable. Supplies is an asset and Accounts Payable is a liability. Supplies increases $630 and Accounts Payable increases $630. As you can see, the asset account Supplies increases $630 and the liability account Accounts Payable increases $630. The basic accounting equation still balances.

32. Learning Objective 3
Use journal entries and T-accounts to show how business transactions affect the balance sheet.
Learning objective number 3 is to use journal entries and T-accounts to show how business transactions affect the balance sheet.

33. Steps 2 & 3: Record and Summarize
Ledger
Transactions
Posted to
Entered in
Used to
prepare
Part I
The system of accounting uses a combination of note-taking and summarizing. First, analyzed transactions are entered in the journal.
Part II
These journal entries are posted to summary sheets that show, for each account, the effects of the month’s transactions.
Part III
These summary sheets, which as a group are called a ledger, then become the basis for preparing financial statements.
Let’s look more closely at the journal and the ledger on the next slide.
Journal
Financial Statements

34. A journal is a record of each day’s transactions.
The Journal and Ledger
Journal
A journal is a record of each day’s transactions.
A ledger is a collection of records that summarize the effects of transactions entered in the journal.
Ledger
Part I
A journal is a record of each day’s transaction. Transactions are entered in the journal in chronological order.
Part II
A ledger is a collection of records that summarize the effects of transactions entered in the journal. The ledger is where you would look to see how much cash a company has, how much in accounts payable a company owes, and how much in revenues a company has earned.

35. The Debit/Credit Framework
Take a moment to see how the increase symbol + appears on the left side of the T-account for accounts on the left side of the accounting equation and on the right side of the T-account for accounts on the right side of the equation.
The same balancing logic applies to decreases, which are on the side of the T-account closest to the equals sign.
Part I
Each item on the balance has its own T-account, which separately summarizes the increases and decreases that occur during the accounting period.
Part II
Because assets appear on the left side of the basic accounting equation, each asset account increases on the left side of the T-account and decreases on the right side.
Take a moment to see how the increase symbol appears on the left side of the T-account for accounts on the left side of the accounting equation and on the right side of the T-account for accounts on the right side of the equation.
Part III
Notice that decreases are on the side of the T-account closest to the equals sign.

36. The Debit/Credit Framework
Debit = Left
Credit = Right
Debit
Credit
Asset accounts increase on the left or debit side and decrease on the right or credit side.
Debit
Credit
Liability accounts increase on the right or credit side and decrease on the left or debit side.
Debit
Credit
Stockholders’ equity accounts increase on the right or credit side and decrease on the left or debit side.
Part I
In every transaction, the total dollar value of all debits equals the total dollar value of all credits. But, what do the terms debit and credit mean?
Part II
Debit means left and credit means right. That is all. Just as sailors use terms like “port” and “starboard” to refer to different sides of a boat, accountants use special terms to refer to different sides of an account.
Part III
Asset accounts increase on the left or debit side and decrease on the right or credit side.
Part IV
Liability accounts increase on the right or credit side and decrease on the left or debit side. This is just opposite of the way assets increase and decrease.
Part V
Like liability accounts, stockholders’ equity accounts also increase on the right or credit side and decrease on the left or debit side.
In every transaction, the total dollar value of all debits equals the total dollar value of all credits.

37. Step 2: Recording Journal Entries
Formal Journal Entries
The financial effects of transactions are entered into a journal using debits-equal-credits format. When looking at these journal entries, notice the following:
A date is included for each transaction.
Debits appear first. Credits are written below the debits and are indented to the right.
Total debits equal total credits for each transaction.
The journal is an internal record of the business, so dollar signs are not needed.
The reference column will be used later to indicate when the journal entry has been summarized in the ledger account.
Any description of the transaction is written below the debits and credits.
The line after the description is left blank before writing the next journal entry.
The process of noting a transaction in the journal in the debits-equal-credits journal entry format is called journalizing.

38. Step 2: Recording Journal Entries
Simplified Journal Entries
When writing journal entries in this course, we will make a few minor changes to the formal entries, which should make it easier for you to learn the most important aspects of recording journal entries.
Note the following about the simplified journal entry format:
The source of the transaction is referenced using a letter if a date is not given.
The reference column and transaction description are not included.
Indicate whether you are debiting (dr) or crediting (cr) each account.
Include the appropriate account type (A, L, SE) along with the direction of the effect (+ or -) next to each account title. By identifying accounts as assets, liabilities and stockholders’ equity, you will become more familiar with the various types of accounts and you’ll make it easier for others to interpret your journal entries.

39. Steps 3: Summarizing in Ledger Accounts
Journal
By themselves, journal entries show the effects of transactions, but do not indicate the balance in each account.
That is why we need ledger accounts. After journal entries have been recorded, their dollar amounts are copied (“posted”) to each ledger account affected by the transaction so that account balances can be computed.
Part I
By themselves, journal entries show the effects of transactions, but do not indicate the balance in each account.
Part II
That is why we need ledger accounts. After journal entries have been recorded, their dollar amounts are copied (“posted”) to each ledger account affected by the transaction so that account balances can be computed.
Ledger

40. The T-account is a simplified version of a ledger.
The T-account is a simplified version of a ledger. It consists only of the increase and decrease columns of the account. In many cases throughout this class, the T-account will be used to represent the ledger accounts.
T-Account

41. A Review of The Accounting Cycle
(1) Analyze
(2) Record
(3) Summarize
DECIDE
Transactions
Journal Entries
In Journals
T-Accounts
In Ledgers
Part I
The accounting cycle is the process used for analyzing, recording, and summarizing the financial effects of business activities.
Part II
Part of the analyze step is to identify transactions and use the DECIDE transaction analysis approach we reviewed earlier.
Part III
Next, we record the transaction in journals using journal entries.
Part IV
Finally, we summarize the transactions in ledgers (or T-Accounts).
Let’s use the transactions for Supercuts we analyzed earlier and focus on steps 2 and 3 of the accounting cycle.

42. You incorporate your Supercuts salon on August 1
You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account.
You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account.
Cash, an asset account, increases with a debit and Contributed Capital, a stockholders’ equity account, increases with a credit.
Take a minute and review the T-accounts after posting the journal entry information to them.

43. Your salon pays $42,000 cash for equipment.
As you can see, the asset account Cash decreases $42,000 and the asset account Equipment increases $42,000. The basic accounting equation still balances. Equipment, an asset account, increases with a debit and Cash, an asset account, decreases with a credit.
Take a minute and review the T-accounts after posting the journal entry information to them. Notice that the Cash account includes the postings for transaction A and B. This accumulation of cash effects will continue until all of the month’s transactions involving cash are included, at which time we will compute a total balance in the account. But, before we do that, we have a bunch more transactions to journalize and post.

44. Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.
Here is another transaction we did earlier.
Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.
As you can see, Cash, an asset account, increases $20,000. Notes Payable, a liability account, increases $20,000. The basic accounting equation still balances. Cash increases with a debit and Notes Payable increases with a credit.
Take a minute and review the T-accounts after posting the journal entry information to them.

45. Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month.
Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month.
Equipment, an asset account, increases with a debit. Cash, an asset account, decreases with a credit. And, Accounts Payable, a liability account, increases with a credit.
Take a minute and review the T-accounts after posting the journal entry information to them.

46. Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet.
Because this event involves the exchange of only promises, it is not considered a transaction. No journal entry is needed.
Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet.
Because this event involves the exchange of only promises, it is not considered a transaction. No journal entry is needed.

47. Your company pays the $2,000 owed to the equipment supplier in (d).
Accounts Payable, a liability account, decreases with a debit and Cash, an asset account, decreases with a credit..
Take a minute and review the T-accounts after posting the journal entry information to them.

48. Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month.
Supplies, an asset account, increases with a debit and Accounts Payable, a liability account, increases with a credit.
Take a minute and review the T-accounts after posting the journal entry information to them.

49. T-Account Balances
To compute the balance in T-accounts, draw a single line through each T-account below the amounts you wish to total.
Then, calculate the ending balance by converting each T-account into equation form, as shown here for Cash and Accounts Payable.
Now, let’s see how to compute a balance in an account.
To compute the balance in T-accounts, draw a single line through each T-account below the amounts you wish to total.
Then, calculate the ending balance by converting each T-account into equation form, as shown here for Cash and Accounts Payable. We want to add everything on the plus side and subtract everything on the minus side. Remember that for Cash, the plus side is the debit side and the minus side is the credit side. For Accounts Payable, the plus side is the credit side and the minus side is the debit side.
Now, let’s look at all the account balances on the next slide.

50. T-Accounts
All ending balances are positive so they are shown on the “+” side with a double underline.
Here are all the T-accounts with their individual balances. All ending balances are positive so they are shown on the plus side with a double underline.
Now that we have the account balances, we can prepare a balance sheet. Let’s see it on the next slide.

51. Prepare a classified balance sheet.
Learning Objective 4
Prepare a classified balance sheet.
Learning objective number 4 is to prepare a classified balance sheet.

52. Preparing a Balance Sheet
The amounts on the balance sheet come from the ending balances in the ledger accounts.
The amounts on the balance sheet come from the ending balances in the ledger accounts.

53. Preparing a Balance Sheet
Current assets will be used up or converted into cash within the next 12 months. Long-term assets include resources that will be used or turned into cash more than 12 months after the balance sheet date.
Current assets will be used up or converted into cash within the next 12 months. Long-term assets include resources that will be used or turned into cash more than 12 months after the balance sheet date.

54. Preparing a Balance Sheet
Current liabilities are debts or obligations that will be paid, settled, or fulfilled within one year.
Long-term liabilities are debts or obligations that will be paid, settled, or fulfilled more than 12 months after the balance sheet date.
Current liabilities are debts or obligations that will be paid, settled, or fulfilled within one year.
Long-term liabilities are debts or obligations that will be paid, settled, or fulfilled more than 12 months after the balance sheet date.

55. Learning Objective 5
Explain the concepts that determine whether an items is reported on the balance sheet and at what amount.
Learning objective number 5 is to explain the concepts that determine whether an items is reported on the balance sheet and at what amount.

56. What is (and is not) recorded?
An item will only be recorded if it comes from an identifiable transaction.
Some very valuable assets are not recorded on the balance sheet because they were not acquired in an identifiable transaction.
For example, one of Regis Corporations most valuable assets, the name “Regis Salons”, is not reported on the balance sheet because it wasn’t acquired in an identifiable transaction.
Some people mistakenly believe a balance sheet reports what a business is actually worth. This is wrong because accounting is based on recording and reporting transactions. This focus on transactions does two things to the balance sheet. An item will only be recorded if it comes from an identifiable transaction. It affects what is (and is not) recorded, and it affects the amounts assigned to recorded items.
Some very valuable assets are not recorded on the balance sheet because they were not acquired in an identifiable transaction.
For example, one of Regis Corporations most valuable assets, the name “Regis Salons”, is not reported on the balance sheet because it wasn’t acquired in an identifiable transaction.

57. Amounts Assigned to Recorded Items
Assets and liabilities are initially recorded at their original cost to the company. This cost principle is one of the main principles of accounting.
While these amounts are accurate at the time of purchase, there is no guarantee that they will continue to represent the “value” of an asset or liability.
Conservatism requires the use of the least optimistic measures when uncertainty exists about the value of an asset or liability.
Assets and liabilities are initially recorded at their original cost to the company. This cost principle is one of the main principles of accounting.
While these amounts are accurate at the time of purchase, there is no guarantee that they will continue to represent the “value” of an asset or liability.
Conservatism requires the use of the least optimistic measures when uncertainty exists about the value of an asset or liability.

58. Why are accountants conservative?
Ethical Insights
Why are accountants conservative?
Financial statements are used by outsiders to make decisions and accountants don’t want to mislead them.
Why are accountants conservative? Financial statements are used by outsiders to make decisions and accountants don’t want to mislead them. This is a very important ethical issue to accountants. If they paint too rosy a picture and lead someone to buy stock in a questionable company, investors may lose their money when things go wrong. So, when faced with uncertainty about the numbers, accountants take a conservative approach.

59. End of Chapter 2
End of chapter 2.