Prepare a Balance Sheet
Practice preparing a classified balance sheet from adjusted trial balance data. Properly classify assets, liabilities, and stockholders' equity.
Problem Scenario
At December 31, Year 1, Foxtrot Inc. has the following adjusted trial balance accounts: Cash $45,000; Accounts Receivable $68,000; Allowance for Doubtful Accounts $3,000; Inventory $92,000; Prepaid Insurance $4,000; Equipment $180,000; Accumulated Depreciation $54,000; Accounts Payable $41,000; Salaries Payable $12,000; Unearned Revenue $8,000; Notes Payable (due in 3 years) $100,000; Common Stock ($1 par, 50,000 shares) $50,000; Additional Paid-In Capital $75,000; Retained Earnings $46,000.
Given Data
Requirements
- Classify all accounts as current asset, non-current asset, current liability, non-current liability, or equity
- Calculate total current assets
- Calculate total assets
- Calculate total current liabilities
- Calculate total liabilities
- Verify the accounting equation balances
Solution
Step 1:
Current Assets: Cash $45,000 + Accounts Receivable $68,000 - Allowance $3,000 (net AR = $65,000) + Inventory $92,000 + Prepaid Insurance $4,000 = $206,000
Step 2:
Non-Current Assets: Equipment $180,000 - Accumulated Depreciation $54,000 = Net Equipment $126,000
Step 3:
Total Assets = Current Assets $206,000 + Non-Current Assets $126,000 = $332,000
Step 4:
Current Liabilities: Accounts Payable $41,000 + Salaries Payable $12,000 + Unearned Revenue $8,000 = $61,000
Step 5:
Non-Current Liabilities: Notes Payable $100,000 (due in 3 years)
Step 6:
Total Liabilities = $61,000 + $100,000 = $161,000. Stockholders' Equity = Common Stock $50,000 + APIC $75,000 + Retained Earnings $46,000 = $171,000. Total Liabilities + Equity = $161,000 + $171,000 = $332,000. This equals Total Assets, confirming the equation balances.
Final Answer
Total Current Assets: $206,000. Total Assets: $332,000. Total Current Liabilities: $61,000. Total Liabilities: $161,000. Total Stockholders' Equity: $171,000. Assets ($332,000) = Liabilities ($161,000) + Equity ($171,000). Current ratio: 3.38.
Key Takeaways
- ✓Contra accounts (Allowance, Accumulated Depreciation) are subtracted from their paired accounts
- ✓Current assets are those expected to be converted to cash within 12 months
- ✓Current liabilities are obligations due within 12 months
- ✓The accounting equation must always balance: Assets = Liabilities + Equity
- ✓Net Accounts Receivable = Gross AR minus Allowance for Doubtful Accounts
Common Errors to Avoid
- ✗Not subtracting contra accounts from their related accounts (showing gross AR instead of net)
- ✗Classifying Notes Payable as current when they are due in 3 years
- ✗Putting Accumulated Depreciation on the wrong side or forgetting to subtract it from Equipment
- ✗Including income statement items (revenue, expenses) on the balance sheet
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Common questions about this problem type
A classified balance sheet groups assets and liabilities into current (within 12 months) and non-current (beyond 12 months) categories. This helps users assess the company's liquidity and long-term financial position.
Current assets will be used up or converted to cash within one year. Current liabilities are due within one year. Anything beyond one year is non-current. Prepaid expenses covering the next 12 months are current; equipment with a multi-year life is non-current.