The Balance Sheet “a statement of financial position” Assets Liabilities Debts owed Things owned = + Owner’s Equity the owners share of the assets

The Accounting Equation Assets = Liabilities + Owner’s Equity A = L + OE

Balance Sheet Statement of Financial Position A “freeze frame” or snapshot of what the business owns, owes and the owners invested interest. A = L + OE A financial picture of the business at a point in time.

The Balance Sheet An indicator of “Financial Strength”

Cash and Liquidity Cash is arguably the MOST valuable asset of a business. WHY?? It can easily be exchanged for other assets An asset is “Liquid” if it is easily exchanged for other assets, or easily turned into CASH.

Assets - OWNERSHIP Ownership (title- legal right to use) is separate from financing (source of funds used to purchase asset). With ASSETS, an owner can: Use Sell Give away Leave to heirs Whether bought for cash or on credit, the owner still has “title” to his/her property

Classification of Assets Current Assets Things owned that will be consumed or turned into cash in < 1 year. E.g.. Cash – used daily in the business to purchase goods and services Accounts Receivable – money owed to a business for product sold or service rendered – collected regularly Inventory – merchandise or raw materials – sold or used to make product, daily Supplies – used regularly in the business (daily, weekly, monthly)

Current Assets – presentation ORDER Of LIQUIDITY Current Assets Cash $ 50,000 CLOSEST TO CASH Accounts Receivable 30,000 Inventory 120,000 Supplies 15,000 FARTHEST FROM CASH Total Current Assets $215,000

Classification of Liabilities Current Liabilities Things owed that will be paid (and use up cash) in < 1 year. E.g.. Wages Payable – paid weekly, bi-weekly or monthly by the business to purchase labour Accounts Payable – debts resulting from goods and services purchased on credit– paid regularly Other Liabilities – Estimates of other debts likely to be paid by the business within one year – (often no invoice received) Current Portion – Long Term Liability – Part of Long Term Debt, such as a mortgage due for payment in the next year.

Current Liabilities – presentation ORDER Of MATURITY* Current Liabilities Wages Payable $ 10,000 FIRST TO BE PAID Accounts Payable 80,000 Other Liabilities 50,000 Current Portion - Mortgage 15,000 LAST TO BE PAID Total Current Liabilities $155,000 * Maturity – When a debt is “mature” it’s payment is due

Classification of Capital Assets (also called Fixed or Long Term Assets) Fixed Assets: things owned that have a useful life of > 1 year. E.g.. Land or Property – unlimited life Building – Physical structure and related fixtures (attached) Useful life varies 30 + years Equipment – machinery used to manufacture a product or produce a service – can also include computer and other technological equipment (3 to 50 year life) Furnishings – Office desks and other necessary furniture (usually < 5 year life) Vehicles – delivery, utility and sales related – 3to5 year life

Fixed Assets – presentation REVERSE ORDER Of LIQUIDITY* Land $ 200,000 MOST DIFICULT TO CONVERT TO $ Building 1,100,000 Equipment 950,000 Furniture 225,000 Vehicles 215,000 EASIEST TO CONVERT TO $ Total Fixed Assets $ 2,690,000 Liquidity – The ability to convert an asset to cash. (? – Is it saleable ?)

Classification of Long Term Liabilities Long term Liabilities: things owed that have a repayment term of > 1 year. E.g.. Mortgages on Land (Property) and Building – Represents funds loaned by a Bank, Financial Institution or Private Business or Individual to the business Repayment terms vary from 5 to 30 + years Long Term Loans other than Mortgages – secured by personal guarantees or other means but not by the assets bought with the loaned money Creditor types and terms similar to Mortgages

Long Term Liabilities – presentation ORDER Of MATURITY* Vehicle Loans $ 150,000 Equipment Loan $ 900,000 SHORTEST TERM Mortgage 850,000 Total Long Term Liabilities $ 1,900,000 LONGEST TERM * Maturity – When a debt is “mature” it’s payment is due

Classification of Owners Equity Owner’s investment in the business, or the financial portion of the business that belongs to the owner. Details: Represents owner’s net investment in the business Made up of: The owner’s investment(s) of cash into the business Add the owner’s share of net income of the business Subtract the withdrawals of cash made by the owner

Owner’s Equity – presentation ORDER SHOWN Owner’s Equity CAPITAL +/(-) INCOME/ (LOSS) THEN SUBTOTAL Owner’s Capital $ 750,000 Plus: Net Income 150,000 900,000 Less: Drawings ( 50,000) SUBTRACT DRAWINGS AND THEN TOTAL Total Owner’s Equity $ 850,000

Owner’s Equity – alternate presentation ALPHABETIC ORDER B. Adams,Capital $ 100,000 A G. Duhany, Capital 50,000 C. Mohan, Capital 60,000 Total Owner’s Equity $ 210,000 Z

LIABILITIES & OWNERS EQUITY Example Company Balance Sheet Month, day, Year ASSETS LIABILITIES & OWNERS EQUITY Liabilities Current Assets Current Liabilities Cash $ 50,000 Wages Payable $ 10,000 Accounts Receivable 30,000 Accounts Payable 80,000 Inventory 120,000 Other Liabilities 50,000 Supplies 15,000 Current Portion - Mortgage 15,000 Total Current Liabilities $ 155,000 Total Current Assets $215,000 Long Term Liabilities Fixed Assets Vehicle Loans $ 150,000 Equipment Loan 900,000 Land $ 200,000 Mortgage 850,000 Furniture 225,000 Total Long Term Liabilities 1,900,000 Building 1,100,000 Total Liabilities $ 2,055,000 Owner’s Equity Equipment 950,000 Owner’s Capital $ 750,000 Plus: Net Income 150,000 900,000 Vehicles 215,000 Total Fixed Assets 2,690,000 Less: Drawings ( 50,000) Total Owner’s Equity 850,000 TOTAL ASSETS $2,905,000 TOTAL LIABILITIES & OWNERS EQUITY $2,905,000

Acme Web Page Designers Balance Sheet As at March 31, 1999 WHO Acme Web Page Designers Balance Sheet As at March 31, 1999 ASSETS: Cash $600.00 Office Equipment 3,400.00 Total Assets: $4,000.00 ======= LIABILITIES: Bank Loan $300.00 Accounts Payable 250.00 Total Liabilities: 550.00 OWNERS EQUITY: Capital $800.00 (Plus) Net Income 2,800.00 3,600.00 (Less) Drawings 150.00 Total Owner's Equity: 3,450.00 Total Liabilities & Owner's Equity: $ WHAT UNDERLINING WHEN