Prepaid expenses or deferred assets include those expenses which have been incurred and entered on the books prior to the actual receipt of the services for which they are intended. They differ from current assets in that the object is not to convert them into cash.
4. Classification of are also divided into classes in the same way as the assets. Debts which must be met in the immediate future will be grouped under the heading of current liabilities. Debts which will not come due for some time or which are covered by pledged assets (as in the case of mortgage bonds) will be given a separate heading "funded debt." If reserves have been set aside to cover depreciation in assets or decreases in income these reserves should be treated as an actual reduction in the value of the appropriate asset account, and not be given a sepa rate section on the credit side of the balance sheet.
Finally, the proprietor's share in the business will be indicated separately. If there are several pro prietors, or if the ownership is in the form of a stock corporation, the divisions of ownership will be clearly indicated.
5. Form as governed by main fea ture to be considered in deciding upon the form of balance sheet, will be the kind of information which is to be presented. If the proprietor is applying to a bank for a temporary loan he would naturally indi cate his current resources as opposed to his current liabilities. In order that emphasis may be placed on this condition, current liabilities and current assets are placed first on their respective sides of his balance sheet.
On the other hand, if a statement is presented as evidence of ability to finance a long time loan, the owner of the business would probably indicate his financial stability by emphasizing the relation of his fixed or permanent assets to his fixed liabilities. This same arrangement would be used if he wanted to em phasize his earning power, which is only another factor to be considered in connection with an estimate of his ability to finance a long time loan.
In every case some governing principle should be followed thruout the preparation of the statement. It may be desirable to list all assets in the order of their availability, beginning with cash and ending with the item least possible of conversion into immediate cash. If financial condition, stability of income, and the like, are to be indicated, the assets should be pre sented in the order of their permanency. This means
that fixed assets would be listed first, and cash last, since cash is the least stable of any asset.
6. A form of balance following is the form of balance sheet in which depreciation has been deducted from the assets. In this illustration, capi tal is placed last on the credit side, chiefly because it indicates what is left for the proprietor after the lia bilities have been liquidated. The assets are arranged in the order of liquidity and the liabilities naturally follow the same plan.
This form does not lend itself so well to the compari son of the amount of the current assets with the com bined total of the current liabilities and undrawn profits; but the profits are not really available for withdrawal—they have been invested in "fixed assets," as also have some of the funds obtained on current lia bilities. It is easily seen that the "fixed assets" con siderably exceed the whole "funded debt," and the original "investment" of the proprietors.
In practice the right side is frequently labeled sim ply "liabilities" altho legally the proprietors' interest does not constitute a liability.
The balance sheet on page 229 illustrates the ar rangement of assets, liabilities and capital as present ing the typical report of large American corporations.
Here the "fixed assets" are stated first, followed by the "current assets," the "prepaid expenses" coming last. On the other side, "capital stock" (which, in a corporation, takes the place of "original investment") is usually placed first and followed by the "Funded Debt" or long time debts, these two often being grouped together under the caption "capital liabili ties" ; second, come the "current liabilities," and finally the remainder of the capital or proprietorship under the name of "surplus." 7. Theory of balance sheet a balance sheet is simply a statement of the condition of the business it need not necessarily be taken from the accounting records. There are two ways of con structing such a statement. One involves simply an actual investigation of quantities and values of assets and extent of liabilities. When the assets and liabili ties have been listed the excess of assets over liabilities constitutes the proprietor's share in the business. This may be called the inventory method of prepar ing a balance sheet.