Accounts & the Balance Sheet
When it comes to understanding the specifics of a company’s finances and business, assets, liabilities, and equities consist of smaller accounts that aid managers and investors in understanding the situation. Additionally, the types of accounts may vary significantly between industries.
Nevertheless, there are a few common ones that any investor will certainly come across.
But First... What Are Accounts?
Accounts are ledgers that summarize specific types of transactions. For instance, a cash account reports all the transactions related to cash in one single ledger; recording every increase or decrease in the company’s cash.
Different accounts are often related to one another as any transaction will usually affect two or more accounts.
For instance, consider the sales and inventory accounts of company XYZ. Whenever the company XYZ sales merchandise, then inventory decreases, and the sales account increases.
Each individual account is then stored in a general ledger also known as financial statements. For example, the cash and inventory accounts are reported under assets in the balance sheet. Meanwhile, sales can be found in the Income Statement.
Accounts and Assets
Cash and Equivalents are very liquid assets that can be converted into hard cash easily and quickly.
Accounts Receivables is the amount of cash collaborators or customers owe to an entity due to merchandise or goods purchased on credit.
Inventory represents the cost of goods and supplies acquired by an entity that has not been sold or used.
Property, Plant, & Equipment (PP&E) refers to all the assets that cannot be converted into cash quickly – such as land, houses, store equipment, and vehicles.
Accumulated Depreciation represents the portion of the cost of PP&E that is estimated to have been used up within a given period. It usually shows up as a negative number.
Prepaid Expenses are the cash amount entities paid in advance to receive services and supplies in the future.
Liquid Asset:
A Liquid Asset can either be cash on hand or an asset that can be readily converted into cash.
Accounts and Liabilities
Accounts Payable is the money that is owed to external entities from the purchase of merchandises or services on credit.
Notes Payable are the obligations that arise from using a note (e.g., bond), and can be both short-term or long-term.
Interest Payable is the total interest expense that has been incurred but still needs to be paid.
Unearned Revenue is a liability arising from receipt of cash before the related revenue has been earned. (Think of it as making money before actually selling a product)
Rent, Utilities, and Wages Payable is the total amount that has to be paid for rent, utilities, and work services.
Long Term Debt is any liability that will not be paid at the end of the next twelve months.
Accounts and Equity
Paid-in Capital represents the capital raised by an entity from selling part of its equity. It always includes common stock and may incorporate preferred stock and additional paid-in capital.
Common Stock represents the basic ownership of an entity. Holders of common stocks have a voting right in controlling the board of directors of a company. However, in case of insolvency (i.e., bankruptcy), common stockholders will be paid back after creditors and preferred stockholders. Common stock is equivalent to par value times number of common stock.
Preferred Stock is an ownership interest with specific preferences to common stock. For instance, preferred stockholders usually have a priority claim to dividends and are paid first in case of insolvency.
However, they do not have voting rights. Preferred stock is equal to par value times the number of preferred stock.
Additional Paid-in Capital reflects the excess of the amount received from the sale of preferred or common stock over par value.
Retained Earnings is the amount of net income that is left over after dividends to the stockholders, partners, or owners have been paid.
Par Value:
It is usually a very small amount, such as $0.10, and has no connection to the market value of the stock. It often appears on stock certificates.
In a Nutshell
Test Yourself!
Public companies usually publish their financial statements on a quarterly and annual basis.
You can find US-based public company’s balance sheets on the US Securities and Exchange Commission (SEC). Search for the 10-K, and you will be ready to go to apply what you’ve just learned!
