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MGTA02H3 (361)
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About Balance Sheets

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University of Toronto Scarborough
Management (MGT)
H Laurence

Balancing the Balance Sheet You have a balance sheet, and you have some transactions that will change it. How do those transactions affect the balance sheet, and how do you record the changes? Suppose you sell something. You normally sell something from inventory. That is one of the assets. Since you have sold it, you no longer have it, and you must reduce the inventory by the value of the item sold. So you determine the value at which you were carrying that item in inventory. That is the value you recorded when you put the item into inventory. Take that value off the inventory line. But something happened when you sold the item. You got something for it. If you got cash for the item, you now have more cash than you had before. So you increase the cash line by the amount you received in cash for the item. You have traded one asset (the inventory item) for another (the cash). Suppose the item of inventory was recorded in inventory at $100. If you sold it for $100, you simply transferred the $100 in value from inventory to cash. But you usually sell items for more than their cost to you. Suppose you sold the item for $200. Now you have reduced your inventory by $100, but you have increased your cash by $200. Your assets have increased by 200-100= $100. Wait the accounting equation must balance. That means that we must always ensure that: assets = liabilities + equity If we increase the assets, we must also increase either liabilities or equity. Since we have sold the item, we clearly do not have a liability. So we must enter the increase in the assets (the $100 extra) in the equity section. We add that to retained earnings. If there is no line for retained earnings, just add one and put the $100 in it. That way the accounting equation balances. You must always enter the net amount of each transaction on BOTH sides of the accounting equation. If you increase one side, you must increase the other. If you reduce one side, you must reduce the other. In many commercial transactions items are sold on credit. You deliver the item and with it you deliver a bill or invoice for the value of the item sold. The customer must pay the bill within a certain number of days. You have created an account receivable. So if you sell the item of inventory for $200, instead of adding the $200 to cash, you add it to your accoun
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