Balance Sheet Line Items

practice management
1

Re: Balance sheet line items from the “Firm Financials” workshop
Question: Some line items on the balance sheet are a bit confusing for me, and I’m hoping someone can elaborate on what they mean.
Under “Fixed Assets”:
• How are “office improvements” an asset?
Under “ Current Liabilities”
• I’m not sure what “Notes payable” means here. Rent?
• Is “accounts payable” referring to the cash this firm owes to its consultants?
• How is “unearned fees/retainers” a liability instead of an asset? Is it because a retainer is a sort of advance payment for services? I’m a bit confused about how this is considered a liability rather than an asset, since it is cash received by the company.
• “Income tax withheld” and “Accrued benefits”: Not understanding how these are liabilities.

Please let me know if there’s somewhere else I can find the answers to these questions; I’ve read through all the PcM AHPP material and haven’t found common line items explained, but I might’ve missed something. Page 427 of AHPP explains what current vs. fixed means, but that seems to be as far as it goes.

Thanks!

2

@coachhayleypugh

3

Hi @amim! Thank you for attending the PcM Virtual Workshop and reaching out with your questions!

An asset is anything that you own that has value. Office improvements add value to your space (particularly if you own the space) and add value, therefore are an asset.

Notes payable are long-term expenses, like rent, a mortgage, a loan, etc.

Accounts payable are any short-term payments that the firm has to make - basically, any bills in their possession. So yes, a bill from a consultant is an account payable.

Unearned fees/retainers are both a liability AND an asset, which makes them cancel out on the balance sheet. When you start a project and receive a retainer, it goes into your account and will show up on the balance sheet under assets, in the cash category. It would be financially irresponsible to count this as an asset of yours since you haven’t yet performed the work, paid the salaries required to get the work done, etc., therefore it must also be included as a liability in order to remove that cash from the balance sheet.

Similar to the above, income tax withheld is cash that has been withheld from employees paychecks, but not yet paid to the taxing authorities. Since it shows up on the balance sheet as an asset (since you have it in cash) it needs to be deducted from the balance sheet here.

Accrued benefits are things like owed PTO, for example. If you owe an employee 3 weeks of PTO and they quit, you’ll need to pay them 3 weeks of their salary. Therefore, it’s a liability (in the financial sense).

I hope this helps. Please reach out if you have any further questions.

Happy studying!

Kiara Galicinao, AIA, NCARB
Black Spectacles