1. Accounting 11 Unit 1 – Financial Position
September 2011

2. Unit 1 Financial Position
Anne is the assistant manager in a community branch of the Bank of Canada. As part of her duties, she authorizes loans to individuals and to businesses that wish to borrow money.
Unit 1 Financial Position

3. Unit 1 Financial Position
Recently, Bob visited Anna to apply for a loan. Bob is a graduate of the NSCC horticulture program and has been working for a landscaper for the past year. Bob would like to own and operate a business. Although quite young, Bob feels that his college training, combined with the practical experience gained over the past year, will enable him to successfully start his own landscaping business.
Unit 1 Financial Position

4. Unit 1 Financial Position
Bob needs $ to start the business. In deciding whether to grant a loan, Anna needs to examine the financial position of the applicant. First, she lists the items owned by Bob:
Items Owned by Bob
Cash $
Government Bonds
Clothing
Furniture
Equipment
Automobile
$57 000
Unit 1 Financial Position

5. Unit 1 Financial Position
Next, Anna lists what Bob owes to creditors.
Creditors are people or businesses that extended credit when goods or services were purchased or who loaned money to purchase possessions.
Debts Owed to Creditors by Bob:
Credit Card debt $ 2 000
Bank Loan
$12 000
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6. Unit 1 Financial Position
Now Anna determines Bob’s financial position.
total value of total owed to = personal net
Items owned creditors worth
$ $ $
Anna has determined that Bob’s net worth is $
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7. Unit 1 Financial Position
Terminology
Assets – items of value owned by a business or person
Liabilities – debts owed to others by a business or person
Personal Equity- represents a person’s net worth
Unit 1 Financial Position

8. Balance Sheet Equation
The balance sheet equation is a way of stating the financial position of a person or business.
Assets = Liabilities Owner’s Equity
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9. Unit 1 Financial Position
Balance Sheet
The balance sheet is a financial statement that lists the assets, liabilities, and personal equity (net worth) at a specific date.
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10. Some additional terminology
a type of asset is Accounts Receivable
Accounts Receivable refers to the total amount due from debtors (customers).
Unit 1 Financial Position

11. Additional terminology
One type of liability is Accounts Payable.
Accounts Payable refers to the total amount owed to creditors for the purchase of goods or services by the business.
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12. Additional terminology
The Owner’s Equity section of a balance sheet lists the owner’s claim to the remaining value, or net value, of the company’s assets after deducting the liabilities.
It is what the company is worth to the owner, it is listed on the balance sheet using the word “Capital” beside the owner’s name.
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13. Balance Sheet Preparation
Step 1: Prepare statement heading
Line 1: WHO? Business name
Line 2: WHAT? Statement name
Line 3: WHEN? Statement date
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14. Balance Sheet Preparation
Step 2: List Assets
Assets are listed in a particular order, in order of liquidity.
Liquidity order is the order In which assets would likely be converted to cash.
For example: Cash, Accounts Receivable, and Office Supplies.
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15. Balance Sheet Preparation
Step 3: List Liabilities
Liabilities are also listed in a particular order, according to the date they are due to be paid, that is the maturity date.
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16. Balance Sheet Preparation
Step 4: Show Owner’s Equity
This section shows the owner’s investment in the business
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17. Valuation of Items on the Balance Sheet
The Cost Principle states that assets are shown on the balance sheet at the cost of their acquisition or construction.
When an asset is obtained, its value is recorded at the actual cost to the business. This figure is never increased even though the owner might think that the value of the asset has risen.
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18. Unit 1 Financial Position
The Business Entity Principle requires that each business be considered a separate entity, and that the financial data for the business be kept separate from the owner’s personal financial data.
Unit 1 Financial Position