In the last 12 lessons this series introduced debits and credits for the six types of accounts. In addition, the financial statement relationship between the balance sheet and the income statement (profit and loss) was explained. Lesson 12 addressed contra accounts. In the examples used with contra accounts it was illustrated how the contra amount is reported with parenthesis.
Remember contra accounts are essentially an offset to a primary account. Contra information is always reported in parenthesis. Well, other information in the two primary financial statements are also reported using parenthesis. This lesson explains parenthesis in balance sheet accounts. For the bookkeeper, the secret to the parenthesis usage is this:
- Parenthesis are always used in reports to identify contra account values; AND/OR
- Parenthesis are sometimes used to report atypical information related to types of accounts.
Many of you are wondering what it is meant by “Atypical”. Atypical refers to information in a type of account that is not traditional but is still normal. To elaborate on this, here are some examples with each of the types of accounts.
The asset type of accounts is split into three distinct groups. For more information read The Balance Sheet– Simple Format.
- Current Assets- Those assets that can be turned into cash in a relatively short period of time (less than one year).
- Fixed Assets- Assets, usually physical in nature, that will be used over more than one accounting cycle. (more than one year)
- Other Assets- Assets that are uncommon and held for use in the future (such as land for future expansion) or intangible in nature. Intangible examples include ownership of copyrights, patents etc. But the most common intangible is the cost of loan financing.
Most often a reader with these types of accounts see contra accounts in parenthesis to include:
- Allowance for doubtful accounts
As explained in Lesson 3 and in Lesson 4, whenever an asset type of account has a credit balance it is customary to report this information down in liabilities. Most small business accounting software is unable to this. Therefore, when an asset type of account has a credit balance such as an overdrawn bank account, the information is reported with parenthesis around the value.
Very similar to asset type of accounts, liabilities have two major groupings. The first are current liabilities; current meaning due within the accounting cycle (less than one year). The second group are long term liabilities; those amounts owed over extended periods of time (more than one year). The traditional value in liabilities are credit balances. The non-traditional types of information are reported via parenthesis, i.e. debit balances.
Debit balances in credit driven accounts include:
- Amounts owed from governmental authorities back to the business for over-payments or tax refunds;
- Payments in excess for payroll related items;
- 3rd party benefit providers owing money back to the company;
- Payroll taxes in excess of filed reported amounts;
- Vacation and sick time paid in advance; AND
- Principle payments in excess of balance remaining related to LT loans.
With equity accounts, contra accounts are abnormal; however, payments to owners can and are often reported as a contra value to retained earnings. Most bookkeepers create primary accounts for draws and distributions for each respective owner. Therefore, parenthesis are used to report this. See below:
Capital paid in excess ZZZ,ZZZ
Retained Earnings ZZZ,ZZZ
Current Earnings ZZZ,ZZZ
Total Equity $ZZZ,ZZZ
There is one really interesting note to parenthesis with equity accounts. In a prior lesson it was explained that when there is a profit or a loss from the income statement it is automatically reported in the current earnings line. Naturally you want sales, which are credit driven, to exceed costs. If so, then the final balance is a profit which results in a credit balance. This profit is displayed in the equity section without parenthesis. After all, it is a credit value in a credit based type of account (Equity).
What happens when the business incurs a loss? Well let’s walk through this.
FOR A LOSS TO OCCUR ON THE INCOME STATEMENT, (PROFIT AND LOSS STATEMENT), COSTS [DEBITS] EXCEED SALES [CREDITS]. IF SO, THEN THE VALUE ON THE BOTTOM LINE IS A DEBIT VALUE WHICH IS REPORTED IN THE “CURRENT EARNINGS’ LINE OVER ON THE BALANCE SHEET IN THE EQUITY SECTION. A DEBIT VALUE IN THE EQUITY SECTION SHOULD HAVE PARENTHESIS AROUND THE VALUE. THUS, LOSSES HAVE PARENTHESIS IN THE EQUITY SECTION.
Summary- Parenthesis on the Balance Sheet
Parenthesis in balance sheet accounts indicate one of the two different possibilities. First the value may be related to a contra account such as depreciation or amortization. The second relates to reporting atypical information. Atypical means that it is not normal to have this, but it can and does happen. The best example is a loss in a business. Losses are not desired but it does happen. This loss is presented with parenthesis as the loss is a debit value in a credit driven type of account. ACT ON KNOWLEDGE.