Accounting for a Service Business Unit 1.2 The Balance Sheet

Your Net Worth What are you worth? Make a list of everything you own…  Have some cash in the bank?  What about your cell phone or laptop computer?  Perhaps some jewelry or an expensive coat?  Does someone owe you money?  Investments?

What are you worth? (continued) Now make a list of how much you owe to others  A loan from the bank (or your parents)  Maybe your current cell phone bill is due  Car loan?  Repay a debt to a friend?

What are you worth? Now take the total of the money owned and subtract the total of the money owed… That’s your Net Worth Things Owned Money Owed Net Worth - =

Presented in the form of a Financial Statement OwnedOwed Cash in Bank $3,200Loan to Parents$ 500 Investments 5,000Loan to a Friend 50 I-Pod 269Cell Phone Bill 66 Cell Phone 159 Computer 1,259Total$ 616 Watch from Papa 750 Signed Autograph Hockey card 500 Net Worth $ 10,521 Total$11,137Total$ 11,137

What About a Business? OwnedOwed Cash in Bank $ 5,000Money Owing to Others$ 4,000 Money Owing from Customer 6,000Money Owing to Bank 65,000 Supplies 500Mortgage Owing 80,000 Land 25,000 Building 110,000Total$ 149,000 Training Equipment 94,500 Net Worth $ 92,000 Total$ 241,000Total$ 241,000

Accounting Terminology Assets  Items of value owned by the business Liabilities  Debts or other amounts owed to others Equity  Represents the businesses Net Worth  The difference between Total Assets and Total Liabilities Balance Sheet  A financial statement used to show the financial position of a business (or person)

Why is it Called a Balance Sheet? AssetsLiabilitiesEquity -= OR Assets = LiabilitiesEquity + This is known as the fundamental Accounting Equation

Back to Our Business … AssetsLiabilities Cash in Bank $ 5,000Money Owing to Others$ 4,000 Money Owing from Customer 6,000Money Owing to Bank 65,000 Supplies 500Mortgage Owing 80,000 Land 25,000 Building 110,000Total Liabilities$ 149,000 Training Equipment 94,500 Equity $ 92,000 Total Assets$ 241,000Total Liabilities & Equity$ 241,000

What is Equity? The owner’s claim to the assets Often referred to as Capital (in a small business sense) If the business was liquidated, the residual money (or capital) would be left for the owner In the case of our example - $92,000

Steps in Preparing a Balance Sheet Prepare the heading  Who?- Name of Business  What? – Balance Sheet  When? – Statement date (as of January 31, 2011) List the assets List the liabilities Calculate the Equity

Listing the Assets There are two types of assets  Current Assets Used in the day-to-day operations of a business Generally used up (or change value) in the short term  Long Term Assets Sometimes called Capital Assets Generally last a long time; in fact the sale of a fixed assets may upset the nature of the business Current Assets are listed in the order of liquidity  The order in which the assets would likely be converted into cash

Liquidity Order –Current Assets CashMost liquid asset Money Owing to Business (Accounts Receivable) Usually converted into cash within 30 days SuppliesQuickly used up in the generation of sales Inventory (in a merchandising business) Sold to generate cash

Order for Capital Assets LandIf land were sold, business would be dissolved or relocated BuildingUsually converted into cash within 30 days EquipmentGenerates sales; often sold and replaced VehiclesDepreciate in value quickly (depending on use) Listed in order of useful life to the business Longest life listed first

Common Recording Practices Try to line the dollar values up in a single column Dollar signs are never used unless a formal statement is being presented A single line indicates an addition or subtraction A double line indicates a final total Abbreviations are never used on formal statements

Business Balance Sheet Goldman’s Gym Balance Sheet As of January 31, 2011 AssetsLiabilities Cash in Bank $ 5,000Money Owing to Others$ 4,000 Money Owing from Customer 6,000Money Owing to Bank 65,000 Supplies 500Mortgage Owing 80,000 Land 25,000 Building 110,000Total Liabilities$ 149,000 Training Equipment 94,500 Equity J. Goldman, Capital$ 92,000 Total Assets$ 241,000Total Liabilities & Equity$ 241,000

Who Uses a Balance Sheet? Owner  Indicates the owner’s claim on assets  Reflects any financial improvement Creditor  Institutions or suppliers considering lending money or credit terms may be interested in repayment Investor  Potential investors may want to see if their money will be protected  Same (general) reasons as creditors Government  Taxes collected (sales tax, HST etc)