Changes in Balance Sheet Accounts - dummies

Changes in Balance Sheet Accounts

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

The figure presents a summary of changes in assets, liabilities, and owners’ equity during the year. Notice the middle three columns, for each of the three basic types of business transactions — operating activities, investing activities, and financing activities.

One column is for changes caused by its revenue and expenses and their connected transactions during the year, which collectively are called operating activities. The second column is for changes caused by its investing activities during the year. The third column is for the changes caused by its financing activities.

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The figure doesn’t include subtotals for current assets and liabilities. The summary of changes in assets, liabilities, and owners’ equity isn’t a required financial statement for external users (stakeholders). The purpose of the figure is to demonstrate how the three major types of transactions change the assets, liabilities, and owners’ equity accounts during the year.

Tying in profit

A $1.69 million increase in owners’ equity–retained earnings account is shown. See the operating activities column. The increase represents net income earned for the year.

The operating activities column is worth lingering over for a few moments because the financial outcomes of making profit appear in this column. Most people see a profit number, such as the $1.69 million in this example, and stop thinking any further about the financial outcomes of making the profit.

This is like going to a movie because you like its title, but you don’t know anything about the plot and characters. You probably noticed that the $1,515,000 increase in cash in this column differs from the $1,690,000 net income figure for the year.

The cash effect of making profit (which includes the associated transactions connected with sales and expenses) almost always differs from the net income amount for the year.

Managing balance sheet activity

The summary of changes presented gives a sense of the balance sheet in motion, or how the business got from the start of the year to the end of the year. Having a good sense of how transactions propel the balance sheet is important.

A summary of balance sheet changes can be helpful to business managers who plan and control changes in the assets and liabilities of the business. They need a clear understanding of how the three basic types of transactions change assets and liabilities.