Chapter 2: The Balance Sheet 1

The Balance Sheet Financial Position 2

Financial Position One of the most important uses of accounting data is to show the Financial Position of a person, a business or an organization What do you think would go into the determination of Financial Position? 3

Financial Position Things you own Things you owe … your debts These are called ASSETS Things you owe … your debts These are called LIABILITIES Calculate the difference between total ASSETS and total LIABILITIES This difference is called CAPITAL or the OWNER’S EQUITY or NET WORTH 4

Financial Position Things you own … Things you owe … ___________________ $_________ ___________________ _________ Total Assets $ Things you owe … ___________________ $_________ ___________________ _________ Total Liabilities $ Capital, Equity or Net Worth … = Total Assets – Total Liabilities = $______________ – $______________ = $ 5

Fundamental Accounting Equation It may be stated as … A – L = OE (Assets – Liabilities = Owners’ Equity) Or the more traditional way is … A = L + OE (Assets = Liabilities + Owner’s Equity) 6

The Balance Sheet Features 10

The Balance Sheet $ 11

Fundamental Accounting Equation $ A = L + OE 12

Assets Liquidity – the order in which the assets are converted into cash $ Listed in order of liquidity 13

Assets Accounts Receivable List of customers who purchased goods or services but will pay at a later date. $ 14

Assets Accounts Receivable List of customers who purchased goods or services but will pay at a later date. They are in debt to the business. $ 15

Assets Accounts Receivable List of customers who purchased goods or services but will pay at a later date. They are in debt to the business. Anyone who owes money to the business is a debtor. $ 16

Assets Accounts Receivable Abbreviated as A/R. $ 17

Assets Accounts Receivable Abbreviated as A/R. Names of customers are listed in alphabetical order by last name. $ 18

Assets Accounts Receivable Abbreviated as A/R. Names of customers are listed in alphabetical order by last name. Listed after cash … as A/R are usually collected within 30 days $ 19

Assets Supplies and long-term assets are listed last as they are not typically converted to cash but are used in the operation of the business. The order shown here is what you will see in the text book. The proper order is to list them in the order they will get … “used up”. $ 20

Liabilities Listed in order of when they are normally paid $ 21

Liabilities Accounts Payable List of suppliers who the company purchased goods or services from but will pay at a later date. $ 22

Liabilities Accounts Payable List of suppliers who the company purchased goods or services from but will pay at a later date. They are amounts owed to creditors. $ 23

Liabilities Accounts Payable List of suppliers who the company purchased goods or services from but will pay at a later date. They are amounts owed to creditors. A creditor is anyone to whom the business owes money. $ 24

Liabilities Accounts Payable Abbreviated as A/P. $ 25

Liabilities Accounts Payable Abbreviated as A/P. Individual creditors are listed alphabetically. $ 26

Liabilities Accounts Payable Abbreviated as A/P. Individual creditors are listed alphabetically. Listed first in the list of liabilities as they are typically paid within 30 days. $ 27

Owner’s Equity Listed separately from liabilities. $ 28

Owner’s Equity Listed separately from liabilities. Show the owner’s name plus the word “Capital”. $ 29

Owner’s Equity Listed separately from liabilities. Show the owner’s name plus the word “Capital”. This figure is the difference between total assets & total liabilities. $ 30

Formatting Conventions The Balance Sheet Formatting Conventions 31

Formatting Title … who, what, & when. $ 32

the financial position The Title WHO The name of the individual, business, or organization $ WHAT The name of the Financial Statement WHEN The date on which the financial position is determined 33

Formatting Sub-headings … Write and underline sub-headings for Assets, Liabilities, & Owner’s Equity. $ 34

Formatting Single ruled line before all sub-totals & totals. $ 35

Formatting Double ruled line after all totals. Totals on the same line $ Totals on the same line 36

Formatting Dollar signs ($) are placed with the first amount in every column A dollar sign ($) is also used beneath each single-ruled line $ 37

Formatting Use columnar paper to keep figures aligned. $ Notice the columns ... thousands – hundreds – tens – single dollars - cents Use columnar paper to keep figures aligned. Even dollar amounts may be shown as “00” or “–” in the cents column. Notice, decimals and commas are not used. 38

Claims Against The Assets The Balance Sheet Claims Against The Assets 42

Claims against the Assets $ Claims of the Creditors Claims of the Owner 43

Claims against the Assets Why do creditors and owners have a claim on assets? They have either provided the funds used to acquire the assets or They have provided the assets themselves 44

Claims against the Assets Who has first claim to the assets? If the business is closed down, the claims of the creditors are settled first The owner must accept any losses from the sale of the assets but may also benefit from any profits 45

The Balance Sheet Accounting Standards 48

The Accounting Standards Board (AcSB) consults with other organizations such as the International Accounting Standards Board (IASB) to make decisions about accounting standards. In 2006 they decided that GAAPs (Generally Accepted Accounting Principles) would be changed to International Financial Reporting Standards (IFRS) Since 2011, private businesses (businesses not listed on stock exchanges) may choose IFRS or ASPE (Accounting Standards for Private Enterprises) to govern heir accounting practices. All businesses must diligently follow an accounting standard practice.

Business Entity Concept The business entity concept provides that the accounting for a business organization must be kept separate from the personal affairs of its owner, or from any other business or organization. What does this mean? The owner of the business should not place any personal assets, such as the family home, on the business balance sheet. The balance sheet must reflect the financial position of the business alone. Any personal spending of the owner are charged to the owner. 51

Continuing Concern Concept The continuing concern concept assumes that a business will continue to operate and use up its assets. What does this mean? It is assumed that the business will continue to operate for an indefinite period of time. Consequently, the assets of the company will continue to be used for their intended purpose and would be valued at their original cost 52

The Cost Principle The cost principle requires accountants to record the value of assets at their purchased, historical price. What does this mean? We are not concerned about the market cost of the items on the balance sheet because we know their original cost. This relates to the continuing concern concept because we do not need to know the market value, as the business will continue to operate and use up its assets (i.e. supplies). 52

Which assets might this apply to most? The Revaluation Model The revaluation model is an IFRS standard that allows accountants to change the value of particular assets based on market conditions. Which assets might this apply to most? 53

Classified Balance Sheet Current Liabilities Current Assets Long-term Liabilities Long-term Assets Equity

Classified Balance Sheet Current Assets - Assets that will be converted to cash or used up in one year. Long-Term Assets - Assets that last longer than one year. Current Liabilities - Due within one year. Long-Term Liabilities - Take more than one year to pay off.

Balance Sheet Statement of Financial Position (IFRS) Equity Long-term Assets Long-term Liabilities Current Assets Current Liabilities