Assets:Everything the business owns.These include bank accounts, inven- tory, accounts receivable, equipment, buildings, vehicles, computers, deposits, and investments. Assets are broken down on the balance sheet into current assets and fixed assets.
Current assets: Any asset the company owns that could be turned into cash within one year.These are listed in order with the most current, cash in the bank, first.
Cash at bank:The total cash in all bank accounts.Each account is reconciled (balanced) with the bank statement or bank book to the cent. When you read the statements, all bank accounts will be grouped together as one total. If the balance is overdrawn, it will show farther down as a liability.
Accounts receivable:Uncollected debts owing to the business.This amount should be balanced to a client list of monies due, called a “receivables list”
or an “aged analysis.” The age of the debt is separated into current, thirty,
sixty, ninety days, and over. This list should be prepared monthly and used to help you collect outstanding accounts.
Prepaid expenses and deposits:Expenses paid ahead of the statement date and/or funds or deposits in trust. Examples of prepaid expenses include the last month’s rent on a lease, a deposit on utility services and annual insur- ance policies. A policy paid in July with a December business year-end has six months of the policy prepaid, which is an expense for the next fiscal period. Prepaid expenses also include equipment maintenance contracts, vehicle and shop insurance, and property taxes. Your accountant will calcu- late these figures for you.
Inventory: The value at cost of unsold materials or products. This includes manufacturing raw materials, goods purchased for redistribution, or finished goods. An inventory evaluation must be taken when a statement is pre- pared. Old, obsolete, or slow-moving products should be devalued in price at year-end and included in this figure. Assets or consumables, such as sta- tionery, are not considered inventory because they are not resold.
Work in progress: Partially completed contracts, services, or manufactured products not yet billed to clients.The value of the work to date is estimated and classified as “work in progress” instead of being called “accounts receivable.”
Fixed assets:An asset owned and utilized by the business. These consist of equipment or similar items with a singular value of over $100. Smaller items, for example, a calculator, are overhead expenses. Fixed assets are listed at purchase cost, not appraised value. They include furniture, fittings, computers, cellular phones, buildings, vehicles, manufacturing equipment, land, machinery, telephone systems, and leasehold improvements.
Leasehold improvements:A permanent addition to a structure.These are assets that remain in the building if a company closes or moves, and include new carpeting, lighting, shelves, or renovations to a building. (See the following definitions for depreciation and amortization to see what happens then.)
Accumulated depreciation:An allowance made for the wear and tear on a capital item (asset).Each type of fixed asset has a defined rate of deprecia- tion, determined by the IRS. Ask your accountant to explain the various rates and methods because initially it can be confusing. Your accountant will depreciate your assets for you and the current year’s depreciation shows on
the income and expense statement. Accumulated capital cost allowance is the total depreciation claimed since the asset was purchased.
Amortization: The allowance for wear and tear on certain fixed assets.
Leasehold improvements are a good example. If you signed a five-year lease and spent $10,000 on improving a building, your accountant would depre- ciate these leasehold improvements over a five-year period, or at a rate of
$2,000 a year. The balance sheet shows the amount of amortization claimed since the improvements were made.
Net book value: The difference between the purchase price of an asset less accumulated depreciation. For example, if equipment is shown at a value of
$40,000 and accumulated depreciation is $35,400, the net book value is
$4,600. This tells you that the equipment has been around for a long time.
Net book value reflects an asset’s true value.
Incorporation fees:Fees paid to incorporate a business.This cost is shown on the balance sheet as an asset and is amortized, starting in the first year, over a period of sixty months. The amortized amount becomes an operat- ing expense.
Goodwill: The intangible dollar value paid for a business. If a person pur- chased the business before you, they probably paid a certain amount for goodwill, and in turn will charge you a goodwill sum. It is amortized over a period of years.
Total assets: The sum of current, fixed, and other assets, less accumulated capital cost allowance.This amount reflects the book value of all assets at the end of the accounting period.
Liabilities: The total of all debts owing by the business. These are broken down into current liabilities and long-term liabilities.
Current liabilities: Debts owed by the business that are due and payable within one year.These include bank overdrafts, short-term loans, supplier accounts (accounts payable), federal and state taxes payable, employee payroll deductions due to various agencies, and Workers’ compensation.
Equity: The amount of money the business owes the owner.In a proprietor- ship, this is the capital put in by the owner less money taken out, plus or minus profits or losses. In an incorporated company, equity consists of the shares issued, plus or minus profits and losses. This section reflects “the bottom line” and overall performance of the business
Long-term liabilities: A debt due and payable over a period of years.
Examples are equipment loans, bank loans, mortgages, loans from friends, and shareholders’ loans. The principal portion due for each loan within one year is recorded under current liabilities. The remaining balance shows under long-term liabilities. Your accountant calculates these balances for you.