The Balance Sheet

In Chapter 3 we discussed the connection between the balance sheet and the expense statement. Expenses are logged on the "T" charts and totals moved to the balance sheet at the next "snapshot in time." The most important aspect of the balance sheet insofar as the project manager is concerned is the "capitalized expense" that is shown on the balance sheet. Large material purchases, and in some cases labor expenses, both internal and supplier provided, as allowed by the GAAP, are often "capitalized." "Capitalized" is a verb that has been coined to capture the idea that certain cash expenses should not be recognized on the expense statement until the item that was purchased is put into use. The GAAP idea is to align use and cost of use in the same accounting period. The balance sheet is where the unrecognized expense is maintained until the time comes to "expense" it to the expense statement. The process of expensing the balance sheet is called "depreciating," and the expense is called "depreciation expense." For example, if a truck is bought for the project in June and depreciation begins in September, when the truck goes into use on the project, there is no actual cash expense in September. The cash went out of the business in June when the truck was purchased. Depreciation is one of the prominent "noncash" expenses on the expense statement. Accruals, already discussed, are the other prominent noncash expenses.