Chapter 1 The Balance Sheet BAF 3M Financial Accounting Fundamentals

The Accounting Equation Assets = Liabilities + Owner’s Equity This fundamental accounting equation provides us with a snapshot of the financial position of a company!

Assets & Liabilities What are Assets? What are Liabilities? Therefore: Anything that a business (or person) owns of value. What are Liabilities? Anything that a business (or person) owes of value. Therefore: Assets = Owns Liabilities = Owes

Examples of Assets A business owns these! Cash ($ in the bank) Accounts Receivable $ that is owed to you by customers – your money in someone else's hands Equipment Cars Computers Furniture (desks, chairs, cubicles) Factory Building Land A business owns these!

Examples of Liabilities Bank Loan Credit Card Debt Accounts Payable Wages Payable Salaries Payable Mortgage Payable Note: “Payables” are amounts that you owe to another business (e.g., bank, employees, supplier) A business owes these!

Owner’s Equity Net worth of a business Difference between assets and liabilities For now, we will use only one owner’s equity account – Capital Recall A = L + OE We can rearrange this equation as: OE = A – L If A > L, a business has a positive net worth If A < L, a business has negative net worth

Account Type Activity You will get a card with an account Your goal is to place yourself in the correct category... Are you an Asset, Liability or Owner’s Equity? Once everyone has his or her account, go to the place in the room where you belong – Asset, Liability, Owner’s Equity Can you get to the right place in less than 20 seconds?

The Balance Sheet (page 7 of text) Step 1 – Prepare Headings Line 1 – Who? Line 2 – What? Line 3 – When? Note: ‘When’ is a specific date – a ‘snapshot’ Step 2 – List Assets on Left Side Put Assets in order of Liquidity Liquidity means how fast the assets can be converted into cash

The Balance Sheet (page 7 of text) Step 3 - List Liabilities on Right Side Put Liabilities in order of Maturity Maturity means that the bills (or accounts) that are due first are listed first Step 4 – Calculate Owner’s Equity & List on Right Side Step 5 – Make sure that your Total Assets (left side) and your Total Liabilities & Owner’s Equity (right side) balance

Balance Sheet ‘Rules’ $ included at top of each column and at final total Single underline indicates a math calculation will occur Double underline indicates a final total No abbreviations A = L + OE → Total Assets and Total Liabilities & Owner’s Equity are on the same line (thus, it balances!)

Sample Balance Sheet

Proper Balance Sheet Order Liquidity Order Cash: most liquid Accounts Receivable: paid within 30 days Land, Building, Equipment: longer term assets – longest life remaining listed first Maturity Order Accounts Payable: due within 30 days Bank Loan: usually 1-5 years Mortgage: usually 25 years

Balance Sheet Order Game You will receive one card with an account or title or subtitle on it Working with the rest of the class, you must build a Balance Sheet – properly formatted – on the board Our goal: accurate Balance Sheet in less than 2 minutes