Accounting 11 Unit 1 – Financial Position and the Balance Sheet

Purpose of Accounting To provide financial information for decision making Every accounting system: Records the day-to-day financial activities of the business Summarizes and reports information in financial statements to be used for analysis and decision making

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

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

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 $ Unit 1 Financial Position Financial Position of a person or company: the financial status represented by that person or company’s assets, liabilities, and net worth or equity

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 $ Bank Loan $ Unit 1 Financial Position

Now Anna determines Bob’s financial position. total value of - total owed to = personal net Items ownedcreditorsworth $ $ $ Anna has determined that Bob’s net worth is $ 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 For Bob: $ = $ $ 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. For Bob, Unit 1 Financial Position Bob Smith Personal Balance Sheet As at September 30, 20-- AssetsLiabilities Cash Government Bonds Clothing Furniture Equipment Automobile $ Credit Card Debt Bank Loan Total Liabilities $ Personal Equity Bob Smith, Net Worth Total Assets$57 000Total Liabilities and Personal Equity $57 000

Some additional terminology One type of asset is Accounts Receivable Accounts Receivable: refers to the total amount due from debtors (customers). 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 continued) 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 Bob Smith Personal Balance Sheet As at September 30, 20--

(Balance Sheet Preparation continued) Step 2: List Assets Assets and their costs are listed on the left side of the page. Assets and Total Liabilities and Owner’s Equity must be on the same line so before totaling assets, make sure to list liabilities first. 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 Assets Cash $ Government Bonds Clothing Furniture Equipment Automobile Total Assets $57 000

(Balance Sheet Preparation continued) Step 3: List Liabilities Liabilities and their amounts are listed on the right side of the page Liabilities are also listed in a particular order, according to their maturity date. Maturity Date: the payment due date of any liability. For example, typically accounts payable are within 30 days, bank loans within 5 years, mortgages within 25 years. Unit 1 Financial Position Liabilities Credit Card Debt $ Bank Loan Total Liabilities

(Balance Sheet Preparation continued) Step 4: Show Owner’s Equity This section shows the owner’s investment in the business Listed on the right side of the page below the liabilities Unit 1 Financial Position Owner’s Equity Bob Smith $ Total Liabilities and Owner’s Equity $

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 (decreased) even though the owner might think that the value of the asset has increased (decreased). Unit 1 Financial Position

Business Entity Principle 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. To think about… why do you think this is important? Unit 1 Financial Position