Understanding the Balance Sheet

If your eyes glaze over when you hear debit or credit, you are not alone. The word “balance sheet” can even make me a bit drowsy. I will try to help you understand what the balance sheet is all about with out causing your head to explode.

The balance sheet shows you what you have in assets and what you owe in liabilities as of a certain date. If the assets are more than the liabilities, the difference is shown as owner's equity. With that difference shown in owner's equity the sheet is in balance, hence the name “Balance Sheet.” Accountants like every thing to balance out to the nearest penny; they are funny that way. In fact, that is the only way accountants are funny.

The assets are comprised of things that are worth something. Bank accounts with lots of money in them are assets. Accounts receivables represent monies owed by delinquent homeowners. That is worth something because we know they will eventually pay up – or else! Prepaid insurance is an asset because if we cancel our policy they would have to give us our money back. These are all considered current assets because we could convert them to cash relatively quickly.

Fixed assets include pool furniture, a truck, plant equipment, etc. It takes longer to convert such items to cash. Nobody wants to buy our old pool furniture. They are more permanent and so are called fixed assets. Everything we have of value is added up to give us the amount of our total assets. We're rich! We're rich! Oh, wait, we owe money too.

Liabilities are obligations to pay money out. It is how much we owe as of a certain date.

Accounts payable are invoices from vendors like the landscaper that we have not paid yet. They did their work and they want their money! Accrued expenses are just like accounts payable except that the vendors haven't sent their bills to us yet. Accrued expenses are accrued estimates at to how much we owe. Accountants don't like to guess at numbers. Careful research and meticulous calculations yield accurate and reliable estimates of expenses.

Prepaid association fees are also liabilities. Homeowners paid their fee early. We are holding their money until it is due; it is not really ours yet. We may have an insurance payable if we pay by installments and still owe money. Sometimes I see prepaid insurance and insurance payable. Wow, that is confusing! The payable number tells us how much more we owe on the yearly policies. The prepaid number tells us how much would be prepaid if we had paid the full amount upfront. Yeah, I don't fully understand it either.

All we own minus all we owe equals owner's equity. This is pure gravy or almost. Owner's equity can be divided into two major categories; operating equity and reserve equity.

Operating equity is the sum of the surpluses or deficits for every year in the past. In simply terms, a surplus is the income minus expenses including an allocation for reserve. A big surplus mean the fee is too high. A big deficit means you spent more than anticipated. A big deficit also means you are borrowing from the reserves to pay for the normal weekly operating expenses.

Reserve equity is similar. Reserve income is the amount budgeted for reserves. Any reserve expenditures are applied against this income allocation. Is that too many big words? Are your eyes glassy? A portion of the fee is set aside each month to save up money for the big projects like paving. Reserve equity represents this savings minus any reserve spending.

So there you have it. Assets plus liabilities equals owner's equity. The secret to life in the accounting world! Next time I will explain the mysteries of the income statement. Until then, keep your debits to your left and your credits to your right.

Dave Breder
Staff Accountant
Mid-Atlantic Management
Plymouth Meeting, PA