USA How to make a balance sheet balance

[MBA Holder]

I have a question related to balancing a balance sheet. If a company borrows money as a long-term debt, it is recorded as a debit for cash and credit for long-term liabilities. However, if the company only incurs expenses afterward, we credit cash and, as a result, cash decreases; however, liabilities stay the same as the company does not pay off any debt in that year. This results in decreasing cash whereas liabilities stay the same which makes a balance sheet unbalanced. How to make the balance sheet balance in this case?

 

[BIG E]

What type of expenses are you talking about?
If they are operating expenses then you dr the expense.
The liability account only is effected if the loan is increased or is reduced.

 

[MBA Holder]

What type of expenses are you talking about?
If they are operating expenses then you dr the expense.
The liability account only is effected if the loan is increased or is reduced.

That is correct. It looks like in this case the equity will be just negative which is quite okay for this company. I just never had a situation of a company with negative equity and wasn't aware that this was normal.

 

[BIG E]

Wasn't there an open equity balance at the start of the business - owners contributing capital to start the business?

 

[MBA Holder]

Wasn't there an open equity balance at the start of the business - owners contributing capital to start the business?

That is correct. That amount was borrowed.

 

[BIG E]

A part of that should be considered equity - which is a permanent part of the business capitalization.
Not all of it should be considered a "loan to be paid back".
Only upon disposition of the business does it effect the taxable gain/loss.
That equity amount is then added together with the gain/loss for year from business activity to create
a total equity balance.
So in your transaction - the expense paid gets netted out against the equity balance

 

[MBA Holder]

A part of that should be considered equity - which is a permanent part of the business capitalization.
Not all of it should be considered a "loan to be paid back".
Only upon disposition of the business does it effect the taxable gain/loss.
That equity amount is then added together with the gain/loss for year from business activity to create
a total equity balance.
So in your transaction - the expense paid gets netted out against the equity balance

Thank you for your insights!
How can I define which part should be assigned to equity/capital?
The loan amount is 20,000; throughout the year various expenses were incurred totaling 15,000. How would a balance sheet look like if there is no income of any kind?

 

[BIG E]

That's your determination to make as how to allocate the funds.
I can't be your online accountant for you.

 

[Kevin Issaya]

A part of that should be considered equity - which is a permanent part of the business capitalization.
Not all of it should be considered a "loan to be paid back".
Only upon disposition of the business does it effect the taxable gain/loss.
That equity amount is then added together with the gain/loss for year from business activity to create
a total equity balance.
So in your transaction - the expense paid gets netted out against the equity balance


Kevin Issaya