Question

Review the balance sheet presented above for possioble errors and make any comments about it below.

Balance Sheet
Assets
Current Assets
	Cash				10,000
	Accounts Receivables				12,000
	Inventory				(20,000)
Total Current Assets					2,000
Fixed Assets
	Building				100,000
	Equipment				50,000
	Accumulated Depreciation				75,000
Total Fixed Assets					225,000
Total Assets					227,000
Liabilities
Current Liabilities
	Accounts Payable				8,000
	Accrued Wages				10,000
	Unearned Revenue				5,000
	Payroll Liabilities				(2,000)
Total Current Liabilities					21,000
Long-Term Liabilities
	Bank Line of Credit				35,000
	Equipment Loan				25,000
Total Long-Term Liabilities					60,000
Total Liabilities					81,000
Equity
	Shareholder Draws				5,000
	Retained Earnings				150,000
Total Equity					155,000
Total Liabilities & Equity					236,000

Answer 1

In the given Balance Sheet.

• Inventory/Closing stack has shown as negative value of $ (20000). Usually Inventory should be positive figure and shown as closing stock in balance sheet as current asset which would encashed once it is sold. Negative inventory is wrong treatment in balance sheet and this is due to improper valuation of physical stock or units are sold without entering the same into system as purchase or items are entered for sales without being concious about whether it is available in stock register. or any adjustment made due to physical verification.
• Accumulated depreciation is provision account. Usually entities used to follow two type of presentation in balance sheet with respect to depreciation.First way is , Debit the depreciation account to profit or loss account and reduce the same from cost of asset, Reduced value ie, written down value will be showned in asset side of balance sheet. Second way is, Debit the depreciation amount to Accumulated depreciation account and same is shown in liabilty side as provision and fixed asset are shown in gross value without reducing depreciation amount. Therefore, In the given question depreciation is debited accumulated depreciation account. Hence it should be shown as provision in liabilty side of balance sheet instead of deducting from fixed asset value.
• Payroll liabilties shows negative figure. Usually liabilities should not have negative value. If it has negative value means it has settled more than what actual liability is made in the books of account. We can intrepet it as two ways, one is it may be prepaid expense or settlement to liabilty has made more than what actually owe.
• Equipment loan, Usually banking institutions sanction the loan based on the security pledged by the entities.If any loan has been given to entity upon fixed asset as collateral security. Then company disclose the same in balance sheet as note under the Loan is disclosed rather than mentioning the leger/long term liabitity name as equipment loan ie. Bank Loan/ Term Loan (in notes - Euipemnt has pledged for aforesaid loan).
• Shareholders drawing should be shown as adjusted with capital account through drawings account rather than shown it as seperately. If it is a company shareholders cannot draw the fund until the company is woundup and they will receive dividend every year if it declares.