The balance sheet account lists a company’s assets and liabilities but also some accounts that do not appear on it. These accounts include accumulated depreciation, unbilled revenue, long-term investments, and cash. Here are the basics of each. Once you know the basics, you can use them to make your own balance sheet.
KEY POINTS
- Off-balance sheet assets are worthwhile but don’t show on the balance sheet.
- OBS assets can be used to shelter financial statements from asset owners.
- It includes assets like accounts receivable, leaseback agreements, and operating leases.
What are Some Types of off-Balance Sheet Account Assets?
1. Unbilled Revenue
Unbilled revenue is revenue that a company has not yet earned. This revenue is classified as a liability because the company has not yet delivered the goods or services to the customer. This revenue appears on the balance sheet in two places: as accrual and as a liability.
In some cases, unbilled revenue results from delayed billing from recurring relationships. In such cases, sending invoices early in the billing cycle may be beneficial. This will give the customer more time to make payments. Also, send out reminders via email to ensure timely payment. Keeping a tab on unbilled revenue will help you understand the cause and how to minimize it.
The first point to consider is whether the revenue you’re receiving is actually billed. If you’re selling software, you may have milestone billing dates, which might be near the end of your accounting period. In that case, you’d include billed revenue in the profit & loss account and debit unbilled revenue on the balance sheet. Unbilled revenue is similar to accounts receivable but without the right to receive cash.
2. Accumulated Depreciation
Accumulated depreciation is a deduction made to the value of an asset. The expense is taken when the asset is no longer useful to the business. Although accumulated depreciation is not reported on the balance sheet, it affects the amount of the listed assets.
In order to calculate accumulated depreciation, an organization must determine the amount of depreciation it has accrued on the asset. There are various methods for this; one is the straight-line method. Another is the declining balance method. The sum-of-years method is also used to calculate accumulated depreciation.
If accumulated depreciation does not appear on the financial statement, creating dedicated sub-accounts is a good idea. These sub-accounts can be set up in an accounting software package.
3. Long-Term Investments
Long-term investments are assets that are held for a long time and recorded at cost. As a result, their values may not reflect changes in the market, and they decrease in value with time. As such, depreciation is applied to these assets to maintain their fair market values. This practice also spreads the expense over time.
Firms use the cost method for almost all short-term and long-term stock investments. However, when investment exceeds 50% ownership, a company uses the equity method. For example, suppose a finance manager invested excess cash in the stock of Ronco, Inc., three years ago. The fair market value of that investment was $31,000 on December 31, 2003. Whether the loss is temporary or permanent will determine how the investment is treated.
4. Cash on Balance Sheet Account
In accounting, cash is a company’s most liquid and current asset. It includes money in checking and savings accounts, legal tender, and undeposited checks. It also includes cash equivalents. These are short-term investment securities with a maturity of 90 days or less. They differ from marketable securities, such as Treasury bills. While some marketable securities may qualify as cash equivalents, others do not.
When a business issues a balance sheet, it reports its assets and liabilities. The assets are those things the company owns. They should be listed in order of liquidity, with the highest-quality assets being the easiest to convert to cash. In addition to cash, a company has liabilities in the form of accounts payable and notes payable. These liabilities will be due at a later date. As cash is depleted, the balance on accounts payable and notes payable goes down. A company can have short-term or long-term debt.
5. Equity
Equity is a part of a company’s financial position. It represents the residual interest of owners in a company’s assets. It increases as the company earns income while decreasing as it incurs losses, pays dividends, or repurchases shares. Its presence on the balance sheet helps analysts assess the company’s financial situation.
Equity is the difference between a assets of a company and its liabilities. It includes the amount of capital stock the company holds and additional paid-in capital, which represents amounts received over par value. In a corporation, equity can also include retained earnings, which represents a company’s profit that has not yet been distributed to shareholders.
Because equity is not fixed, it changes with the value of a company’s assets and liabilities. Therefore, it is necessary to reflect equity changes with each change in assets and liabilities. The equity account is made up of two parts, the revenue account, and the expense account. Together, these two components represent the total shareholders’ equity.
Final Wordson Balance Sheet Account List
That’s all about those accounts that don’t appear on the balance sheet, and these accounts are considered in the process of financial statement creation. They also affect the accuracy of the financial statements.
