1. Chapter 2:
The Balance Sheet

2. The Balance Sheet
Financial Position

3. 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?

4. 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

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

6. 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)

7. Exercises Classify each of the following as an asset or a liability:
Office furniture
Land
Bank loan
House and lot
An unpaid heating bill
An amount loaned to R. Jones
Mortgage payable
Automobile
A Canada Savings Bond

8. Exercises
Karen Lipka has assets of $150,000 and liabilities of $65,000. What is her equity?
If the total assets of a business are $37, and the total liabilities are $11,547.80, calculate the owner’s equity.

9. 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. Exercises Prepare the September 30th balance sheet
Kate Kramer is the owner and operator of The Kramer Company located in Kingston, Ontario. On September 30, --, The Kramer Company had the following assets and liabilities.
Cash $ 1, J. Crothers (debtor) ,100
R. Zack (debtor)
Supplies , Furniture & Equipment 14,700
Delivery Equipment 20, Bank Loan ,000
Able Supply Company (creditor) ,740
C.P. Gregg (creditor) ,000
Prepare the September 30th balance sheet
If the Kramer Company were a retailing business, it would list an asset named “Merchandise Inventory.” What do you suppose Merchandise Inventory is? After which asset on the balance sheet would you place Merchandise Inventory? Why?
p. 24

39. Claims Against The Assets
The Balance Sheet
Claims Against The Assets

40. Claims against the Assets$
Claims of the Creditors
Claims of the Owner

41. 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

42. 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

43. Exercise
Joseph Litz is the owner of Bayliner Boat Charters, a business in Truro, Nova Scotia, that has six sailboats for hire. Mr. Litz has been able to make a comfortable living from renting out these boats during the sailing season. Mr. Litz is past retirement age and is finding the business more than he can comfortably handle. He has attempted to sell it intact, but has been unsuccessful. He has decided to sell the assets for cash and pay off the claims of the creditors. In this way, he can get his equity out of the business.

44. Exercise (continued)
Mr. Litz hires a liquidator to help him. Through this person’s services, the accounts receivable are collected in full. The supplies are sold for $500; the equipment is sold for $2,000; the boats are sold for $20,350; and the property is sold for $180,000. The liquidator charges $1,500.
Prepare a detailed calculation showing how much Mr. Litz will receive as a result of his claim against the assets.
Why would the owner prefer to sell the business itself rather than the assets?

45. The Balance Sheet
Accounting Standards

46. IFRS and ASPE AcSB: Accounting Standards Board
IFRS: International Financial Reporting Standards
Public Companies
ASPE: Accounting Standards for Private Enterprises

47. GAAP
Generally Accepted Accounting Principles (GAAPs) are a set of rules or standards followed by accountants
Some are formal regulations while others set out what has become common practice over the years

48. GAAP – 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 expenditures of the owner are charged to the owner.

49. GAAP – Continuing Concern Concept
The continuing concern concept assumes that a business will continue to operate unless it is known that it will not. This is also known as the going concern concept.
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.
When a company is going out of business the value of assets would usually suffer because they have to be sold under unfavourable circumstances

50. GAAP – Principle of Conservatism
The principle of conservatism provides that accounting for a business should be fair and reasonable.
What does this mean?
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 exits.

51. Classified Balance Sheet
Current Assets
Long-term Assets
Current Liabilities
Long-term Liabilities

52. Exercise
Kevin Kaghee is the owner of Central Paving Company in Charlottetown, PEI. His personal and business assets and liabilities are:

53. Exercise Separate the list into two columns … Business and Personal.
Calculate the total assets and the total liabilities in each column.
Calculate Kevin Kaghee’s personal net worth and his equity in Central Paving Company.

54. Review Exercises Complete the following
Pages : Review Exercises 1-4
Page 49: 5-6