BAF 3M1 THE BALANCE SHEET Chapter 2, Section 2.1

Financial Position  One of the most important uses of accounting data is to show the financial position of a person or a business.  Three steps are necessary to determine financial position: Step 1: List and total the things that you own that have dollar values. These are called ___________________. Step 2: List and total the things that you owe (debts). These are called _____________________. Step 3: Calculate the difference between total assets and total liabilities. The difference is called the capital, or the _________________ ________________.

An example Let’s work out the financial position for Ms. Katipunan on September 30, 2008: Assets:Liabilities: Cash $10,000Owe to brother $200 Laptop $700Owe to sister $50 Shoes $800 Total Liabilities $250 Clothes$ 5000 Total Assets $ Equity: Total Assets – Total Liabilities $ $250= $16 250

The Fundamental Accounting Equation _____ – _____ = _____ (__________ – ____________ = _______________) or _____ = _____ + ______ (__________ = ____________ + _______________) Note: This equation is extremely important in accounting. It is the basis on which accounting is built.

An example The fundamental accounting equation at work: Example 1: Assets: $1000 Liabilities: $300 What is the owner’s equity figure? Example 2: Liabilities: $5000 Owner’s equity: $500 What is the assets figure? Example 3: Assets: $2000 Owner’s equity: $1000 What is the liabilities figure?

BAF 3M1 THE BALANCE SHEET Chapter 2, Section 2.2

The Balance Sheet  The formal way of presenting financial position  The balance sheet is a statement ________________ ________ ________________ _________________ of a person, business, or organization  See The Balance Sheet handout

Features of the balance sheet  Refer to ‘The Balance Sheet’ handout 1. Set up in the form of the fundamental accounting equation, A = L + OE. (Assets on the left, Liabilities and Owner’s equity on the right) 2. Three-line heading is used:  ____________? (The name of the individual, business, organization)  ____________?( The name of the financial statement)  ____________? (The date on which the financial position is determined)

Features of the balance sheet cont’d 3. Assets are listed in order of ________________. Liquidity means the order in which the assets are converted into cash. (Cash on hand and Bank Balance, being cash already, are the most liquid, and are listed first) 4. Liabilities are listed in the order in which they are to be paid 5. The two final totals, one on each side of the balance sheet, are recorded on the same line and underlined with a double line

Preparing a Balance Sheet  Refer to ‘The Balance Sheet’ handout Step 1: Write in the statement heading Step 2: Write in the sub-heading ‘Assets’ at the top of the left-side column. List the assets and amounts in order of liquidity. Do not enter the ‘Total Assets’ figure at this time. Step 3: Write in the sub-heading ‘Liabilities’ at the top of the right-side column. List the liabilities and amounts in order of when they need to be paid (sooner first, then later last). Enter the ‘Total Liabilities’ figure. Step 4: Beneath ‘Total Liabilities’, write in the sub-heading ‘Owner’s Equity’. Then write the Owner’s name plus the word “Capital” (ex. C. Katipunan, Capital). Enter the Owner’s Equity figure.

Preparing a Balance Sheet cont’d Step 5: Complete the balance sheet by writing in the grand totals. These totals are written on the first fully open line. On this line, write in ‘Total Assets’ on the left side and ‘Total Liabilities and Equity’ on the right side. Enter in the totals. The two totals must be on the same line, and must be equal. Place a single ruled line above and a double ruled line below each of the grand totals. Dollar signs are placed with the first amount in every column, and beneath each single-ruled line in each column. Notes:  Avoid using abbreviations  Strive for neatness, accuracy, and clarity

Accounts receivable and Accounts Payable  ___________________________: the debts of customers Customers of a business often buy goods/services with the understanding that they will pay later. These customers owe money to the business, or are in debt to the business. Anyone who owes money to the business are known as debtors.  ___________________________: the debts owed by the business A business often purchases goods/services with the understanding that payment will be made later. The business is in debt to its suppliers. Anyone to whom the business owes money are known as a creditors.

BAF 3M1 THE BALANCE SHEET Chapter 2, Section 2.4

Generally Accepted Accounting Principles (GAAP)  Accountants follow a set of rules or standards known as GAAPs. They include a number of specific rules, practices, and procedures.  The Canadian Institute of Chartered Accountants (CICA) is the professional accounting organization that establishes the standards for accounting in Canada.

GAAP – The Business Entity Concept  The business entity concept provides that the accounting for a business organization must be kept _________________ from the ________________ ________________ of its _____________, or from any other business or organization.  Any personal expenditures of the owner are charged to the owner. They are not allowed to affect the operating results of the business. (ex. The owner purchased a car for personal use)

GAAP – The Continuing Concern Concept  The continuing concern concept assumes that a business will __________________ _______ ______________ unless it is known that it will not (also known as going concern concept).  When a company is going out of business, the values of the assets usually suffer because they have to be sold under unfavourable circumstances. Although sometimes the values improve (ex. Land).

GAAP – The Principle of Conservatism  The principle of conservatism provides that accounting for a business should be ___________ and ____________________.  Accountants are required to make evaluations and estimates, to deliver opinions, and to select procedures.  They should do this in such a way that assets or profits are neither overstated nor understated when uncertainty exists.