1. Financial Accounting Lesson 2: The Balance Sheet
Ben Trnka/Boz Bostrom

2. Let’s start with an example!
To the right is Nike’s Balance sheet as of May 31, 2018
1. How much debt does Nike have?
2. If this seems like a lot, compare to the
total value of Nike’s assets.
3. Nike currently has a market cap of approximately
$124 Billion. How much did shareholders contribute?

3. Overview: Understand assets, liabilities, and equity
Understand how companies track these amounts using transaction analysis and journal entries

4. Assets
Any economic resource that will provide future benefits to a business
Examples:
Cash – provides an immediate benefit in that businesses can either reinvest or distribute to owners.
Property, plant, and equipment – Can use for the foreseeable future to generate cash for the business
Typically broken into two categories:
Current Assets
Noncurrent Assets

5. Liabilities
Future obligations of economic resources based on past events
Examples:
Accounts Payable – When a company receives goods and promises to pay later
Long-term debt – When a company borrows money, typically from a bank, and promises to repay in the future
Typically broken into two categories:
Current Liabilities
Noncurrent Liabilities

6. Equity Equity Common Stock Retained Earnings
Equity is the stockholder’s claim to the assets after liabilities have been satisfied. Equity is commonly broken apart into two parts:
Money contributed by the owners, typically called Common Stock or Contributed Capital
Money earned by the business that has not been distributed to owners, called Retained Earnings.
Note: This category gets much more complicated!

7. Knowledge Check
Place the accounts on the left into one of the categories from the bank on the right.
Accounts:
Cash
Accounts Payable
Retained Earnings
Debt
Common Stock
Equipment
Inventory
Land
Categories
Current Assets
Non-Current Assets
Current Liabilities
Non-Current Liabilities
Equity

8. Why should you care? Investors Creditors Balance Sheet
Examples
Before making a loan, creditors look at assets relative to total debt
Before deciding to purchase a stock, investors look at current assets relative to current liabilities
Investors
Creditors
Balance Sheet
Investing Decision

9. How do companies keep track of everything?
Could have billions of dollars in multiple countries around the world
Each transaction is recorded in a company’s accounting program using a system called Double Entry Accounting

10. Balance Sheet Equation
Assets = Liabilities + Equity
Debit
Credit + -
Debit
Credit - +
Debit
Credit - +

11. Assets = Liabilities + Equity
Example 1: Owners contribute cash of $1,000 to start a business
Example 2: A business borrows $500 from the bank

12. Assets = Liabilities + Equity
Example 3: Business buys equipment with $700 of cash

13. General Process for determining Journal Entries
Instead of using T-Accounts, most companies use journal entries to record transactions
When given a business transaction:
Identify accounts (and categories) impacted – will always be at least two
Determine whether each account is increasing or decreasing
For each account, determine if it increases on the debit or credit side
Record the journal entry
Double check to make sure total debits equal total credits

14. Transaction Analysis – Example 1
A company purchases $300 of inventory using cash
Identify accounts (and categories) impacted – will always be at least two
Inventory and Cash
Determine whether each account is increasing or decreasing
Inventory is increasing
Cash is decreasing
For each account, determine if it increases on the debit or credit side
Inventory increases on the debit side
Cash decreases on the credit side
Record the journal entry
Dr. Inventory
Cr. Cash
Double check to make sure total debits equal total credits
Cash
Inventory
Company
Vendor

15. Transaction Analysis – Example 2
A company purchases $200 of supplies and agreed to pay the vendor in 30 days
Identify accounts (and categories) impacted – will always be at least two
Supplies and Accounts Payable
Determine whether each account is increasing or decreasing
Supplies is increasing
Accounts Payable is increasing
For each account, determine if it increases on the debit or credit side
Supplies increases on the debit side
Accounts Payable increases on the credit side
Record the journal entry
Dr. Supplies
Cr. Accounts Payable
Double check to make sure total debits equal total credits
Cash
Supplies
Company
Vendor

16. Keeping track of everything – wrap up
Using accounting software, a business records transactions using journal entries
The software then posts the journal entries into the T- Accounts
Finally, the totals in the T- Accounts are used to create the Balance Sheet.
Journal Entry
T-Account
Balance Sheet

17. Thanks for tuning in! Key Takeaways Assets, Liabilities, and Equity
Understand each category
Classify accounts into each category
Know how to record transactions using journal entries
Identify accounts and direction
Match debits and credits
Make sure debits = credits at the end
Thanks for tuning in!