MSE608C – Engineering and Financial Cost Analysis

The Balance Sheet and Double-Entry Bookkeeping

Assets on the Balance Sheet

• Current Assets are “used up”, “expended” or converted into cash within 12 months

• Some expenses are Prepaid in advance. These become an ASSET

Assets on the Balance Sheet

• Non-current Assets are “used up” or “expended” in a period longer than 12 months

• Non-current Assets do not have a category title, they are just listed after Current Assets

Liabilities on the Balance Sheet

• Current Liabilities are “discharged” or “paid off” within 12 months.

Owners’ Equity on the Balance Sheet

• Owners’ Equity is the difference between Assets and Liabilities.– The value remaining in the company for the owners.– Not a pool of cash– Revenues increase Owners’ Equity; Expenses decrease it.

• Invested Capital = Voluntary investment of funds• Retained Earnings = residual value from profit-seeking activities• Retained Earnings help the business to grow

Double-entry Bookkeeping

• Newton’ Third Law of MotionFor every action there is an equal and opposite

reaction

• Accounting rulesFor every Debit there is an equal and opposite

Credit recorded in the accounting records

Double-entry Bookkeeping

• Double-entry bookkeeping is the accepted accounting mechanism for recording and classifying the monetary events of a business entity

• The T-account format:

• For every monetary event there is at least one entry on the debit side of at least one account and the credit side of another account.

Title and Account #

+ Debit side + Credit side

Double-entry Bookkeeping

A = L + OE

Asset

+ - =Liabilities

- +

Owners’ Equity

- ++

Account Type + Debit Effect + Credit Effect

Assets Increase Decrease

Liabilities Decrease Increase

Owners’ Equity Decrease Increase

Chart of Accounts

The Journal

The Ledger

The Cycle at Work

Assessment

• Owner’s Equity is comprised of what two components?

• What is the basic “law” of double-entry bookkeeping?

• What are the first stages of the Accounting Cycle?