1. Chapter 1 The Balance Sheet
BAF 3M
Financial Accounting Fundamentals

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

3. 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

4. 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!

5. 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!

6. 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

7. 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?

8. 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

9. 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

10. 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!)

11. Sample Balance Sheet

12. 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

13. 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