Crash Course in Accounting and Financial Statement Analysis, Second Edition

Balance Sheet

Based on these transactions, the balance sheet would look as follows:

Balance Sheet: Ending January 1, 2005 Assets Liabilities Cash 150 Accounts Payable 0 Accounts Receivable 0 Debt 50 Inventories 0 Total Liabilities 50 PP&E 0     Total Assets 150 Shareholders’ Equity     Common Stock and APIC 100     Retained Earnings 0     Total SE 100

Assets must equal Liabilities + Shareholders’ Equity by definition. They are two sides of the same coin.

When the lemonade stand’s assets increased by $150, this was accompanied by a corresponding increase in liabilities and shareholders’ equity. There had to be a source of cash (it had to come from somewhere). This is why the balance sheet must always balance.

In reality, companies have more assets than just cash.

• Companies use cash to buy inventories and fixed assets (e.g., land, buildings, machinery), and to make investments.

• Cash is reduced and other assets are increased.

Any change in assets or liabilities or shareholders’ equity is accompanied by an offsetting change that keeps the balance sheet in balance.