1. Chapter 2

2. Agenda Learning goals Vocabulary 2.1 Financial Position
2.2 The Balance Sheet
2.3 Claims against the Assets
2.4 Accounting Standards
2.5 A Spreadsheet for Balance Sheet

3. Learning goals How to measures a financial position
What are assets and liabilities
What is a Balance Sheet.
Rules of preparing a Balance Sheet
What does it mean to have claim against the assets
What is GAAP, IFSR, AcSB
What is equity concept, cost principle, revaluation model
Different types of balance sheet

4. Vocabulary Assets Accounts payable Business entity concept Liabilities
Canadian Generally Accepted Accounting Principles (GAAP)
Cost principle
Equity
Revaluation model
Accounting Standard Board (AcSB)
Capital
Classified balance sheet
Owner’s equity
Current assets
International Accounting Standard Board (IASB)
Net worth
Long-term assets
International Financial Reporting Standard (IFRS)
Fundamental accounting equation
Current liabilities
Liquidity
Accounting Standards for Private Enterprises (ASPE)
Accounts receivable
Debtor
Continuing concern concept

5. 2.1 Financial Position
Financial positon: status of the business based on its assets, liabilities and owner’s equity.
If you wanted to determine your own financial position, how would you go about it?
Step 1: list and total the thing that you own that have dollar values. These are called assets
Step 2: List and total your debts. These are called liabilities
Step 3: Calculate the difference between total assets and total liabilities. This difference is called equity/capital/owner’s equity/net worth.

6. Example on page 18-19 Lets take a look at it together
Now do one for yourself!

7. The Fundamental Accounting Equation
Assets: anything that is owned that has a dollar value
Liabilities: a debt of an individual, business or other organization.
Owner’s Equity: the difference between the total assets and total liabilities of a business. Same as Capital, Equity and Net Worth

8. Balance sheet video

9. Review questions Do the review questions on page 19
When finished do exercise – to be handed in

11. Before we discuss rules for the balance sheet you must understand the following terms:
Accounts Receivable (A/R) : when customers buy goods or services from you but don’t pay you right away. This is considered an asset.
Debtor: is anyone who owes money to the business

12. Before we discuss rules for the balance sheet you must understand the following terms:
Accounts Payable (A/P): when you buy goods or services from another company but don’t pay for it right away. This is considered a liability.
Creditors: people or companies that a business owes money to. This means that they can “claim” part of the business because they have either provided the assets or money to purchase the assets.
If a business closes, creditors are paid off first with the business’ assets and then the owner claims what is left over. Assets are sold for money to do this.

13. 2.2 The Balance Sheet Is a formal way of presenting information
Balance sheet – is a statement showing the financial position of a person, business, or other organization.
Formats of balance sheets vary- we will learn about that in section 2.4

14. Important Features of the Balance Sheet
Please look on page 21 of your textbook and compare figure and 2.2 balance sheet and find similarities.

15. There are rules that MUST be followed on a balance sheet
On the left, the assets are listed. On the right the liabilities and owner’s equity are listed. (This follows the formula A = L + OE).
There is also a three-line heading:
WHO? The name of the individual, business, or other organization
WHAT? The name of the financial statement
WHEN? The date on which the financial position is determined
Assets are listed in order of liquidity, which means the order in which the assets could be most quickly changed into cash.

16. There are rules that MUST be followed on a balance sheet
Liabilities are listed in the order that you would pay them back
Liabilities and assets aren’t put into further categories and summarized, they are kept separate. Detail need to be provided on the breakdown of assets and liabilities.
The total assets and total equity/liabilities are shown on the same line

17. There are rules that MUST be followed on a balance sheet
Don’t abbreviate anything unless it’s abbreviated already
Two zeros in the cents column may be replaced with a small horizontal line
When writing the total, a single line is drawn above the line and double line is drawn below. These lines must be attached to the total.

18. You should also:
Include the subtitles: assets, liabilities, and owner’s equity. Italicize these subtitles or underline if doing by hand.
List all items together under the Accounts Receivable and Accounts Payable Titles. Than tap draw a small horizontal line and provide a breakdown who owes money to whom money is owed

19. You should also:
For Owner’s Equity, write the name of the owner, followed by the word “Capital” example Ms. Katz, Capital
Include a dollar sign beside the first dollar amount in any column and below any single-ruled line in each column
ALWAYS USE A PENCIL AND A RULER! IT MUST BE VERY NEAT!!

20. Practice and Homework:
Open page 23 and follow Step 1-6! For practice
Do the review questions on page 28 (1-17)
Practice Section 2.2 Exercises 1-3  to be handed-in

21. 2.3 Claims against the Assets
Why do the creditors and owner have a claim on the assets?
They either provided the funds used to acquire the assets, or they have provided the assets themselves.
Remember A = L + OE

22. Page 30

23. Creditors’ Claim First
What happens when a business is closed down, who gets to claim the assets?
-Assets belong to both the creditors and owner
-but but but! The CREDITORS get FIRST CLAIM. Which mean that the owner get to keep what is leftover.

24. Pg 31 example Suppose that Grace Cho closed down Pacioli Designs:
-collected the accounts receivable
-sold the supplies, furniture, equipment and automobile. However she sold them for less than the values listed on the balance sheet
- after all the business was left with a total assets of $ in cash. ($ loss form $ to $37 571)

25. You can see that the creditors (liabilities) claim did not change the decrease in assets value decreased owner claim (equity)

27. Review Questions
1-5 and Exercises 1+2  to be handed in

28. 2.4 Accounting Standards
RULES, accountant throughout the world follow sets of rules or standards.
CICA establishes the standards for Canadian Accountants. That can be found in the CICA Handbook.
GAAP-Canadian Generally Accepted Accounting Principles: specific guidelines established by professional accountants to be followed in the preparation of accounting record and financial statements
Accounting Standard Board (AcSB) – an independent Canadian organization that develops and establishes accounting standards for the Canadian private sector.

29. Accounting Standards
In 2006 AcSB announced that they are replacing GAAP with IFRS (International Financial Reporting Standards) – public companies
Over 100 countries have adopted this standards and joining the globalization trend.
AcSB created Accounting Standard for Private Enterprises (ASPE) to help them move toward the International Financial Reporting Standards.

30. Accounting Standards A few important rules: Equity concept
Cost Principle
Revaluation model

31. Entity concept
There should be a clear separation that keeps the accounting of an organization separate from the personal affairs of the owner.
Which means that the owner can not place nay personal assets, such as the family home, on the business balance sheet.

32. Cost Principle
Value of assets need to be record at their historical cost. Being the cost at which they were purchased.

33. Revaluation Model IFSR rule that changed the Cost Principle
Revaluation model says: asset’s value on the balance sheet could be changed to market value for more accurate representation of the assets.
Ex. Automobile was bought at $ dollar under the Cost Principle it will always be reported at the amount.
According to the revaluation model if the current market value of the automobile is $30 000, it should be reported as such on the balance sheet.
Where would the extras $8 150 be reported to ensure the balance sheet balances?

34. IFSR and Balance Sheet Formats
Classified balance sheet
Statement of financial position
Current assets
Current liabilities
Long-term assets
Long-term liabilities
Equity
Long-term assets
Equity
Long-term liabilities
Current assets
Current liabilities
Allows the reader to quickly see if the company has enough operational value
Allows the reader to truly evaluate the true net worth of the company

35. IFSR and Balance Sheet Formats
Current assets: are cash and assets that will be converted into cash within one year, such as accounts receivable and supplies that will be used in one year.
Long-term liabilities: are item like land, building and equipment's. These assets last longer than one year.
Current liabilities: are those that are due with a year, such as accounts payable
Long-term liabilities: take more than a year to pay off. A mortgage is a good example