Accounting 11 Unit 1 – Financial Position September 2011

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

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

Unit 1 Financial Position Bob needs $10 000 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 $ 4 000 Government Bonds 5 000 Clothing 3 000 Furniture 15 000 Equipment 10 000 Automobile 20 000 $57 000 Unit 1 Financial Position

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 10 000 $12 000 Unit 1 Financial Position

Unit 1 Financial Position Now Anna determines Bob’s financial position. total value of - total owed to = personal net Items owned creditors worth $ 57 000 $ 12 000 $ 45 000 Anna has determined that Bob’s net worth is $45 000. Unit 1 Financial Position

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

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 Unit 1 Financial Position

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. Unit 1 Financial Position

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

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. Unit 1 Financial Position

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. Unit 1 Financial Position

Balance Sheet Preparation Step 1: Prepare statement heading Line 1: WHO? Business name Line 2: WHAT? Statement name Line 3: WHEN? Statement date Unit 1 Financial Position

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. Unit 1 Financial Position

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. Unit 1 Financial Position

Balance Sheet Preparation Step 4: Show Owner’s Equity This section shows the owner’s investment in the business Unit 1 Financial Position

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. Unit 1 Financial Position

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