the balance sheet “a statement of financial position” assets things owned liabilities debts owed...
TRANSCRIPT
The Balance Sheet“a statement of financial position”
Assets
Things owned
Liabilities
Debts owed
+ Owner’s Equity the owners share of the assets
=
The Accounting Equation
Assets = Liabilities + Owner’s Equity
A = L + OE
Balance SheetStatement 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 SheetAn indicator of
“Financial Strength”
Cash and LiquidityCash 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 AssetsCurrent 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
Current Assets
Cash $ 50,000
Accounts Receivable 30,000
Inventory 120,000
Supplies 15,000
Total Current Assets $215,000
ORDER
Of
LIQUIDITY
CLOSEST
TO
CASH
FARTHEST FROM
CASH
Classification of LiabilitiesCurrent 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
Current Liabilities
Wages Payable $ 10,000
Accounts Payable 80,000 Other Liabilities 50,000
Current Portion - Mortgage 15,000
Total Current Liabilities $155,000
ORDER
Of
MATURITY*
FIRST
TO BE
PAID
LAST
TO BE
PAID
* 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 – presentationFixed Assets
Land $ 200,000
Building 1,100,000 Equipment 950,000
Furniture 225,000
Vehicles 215,000
Total Fixed Assets $ 2,690,000
REVERSE ORDER Of
LIQUIDITY*
MOST DIFICULT TO CONVERT TO $
EASIEST TO CONVERT TO $
•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
Long Term Liabilities Vehicle Loans $ 150,000 Equipment Loan $ 900,000 Mortgage 850,000
Total Long Term
Liabilities $ 1,900,000
ORDER Of
MATURITY*
SHORTEST TERM
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
Owner’s Equity
Owner’s Capital $ 750,000
Plus: Net Income 150,000
900,000
Less: Drawings ( 50,000)
Total Owner’s Equity $ 850,000
ORDER SHOWN
CAPITAL +/(-)
INCOME/
(LOSS)
THEN
SUBTOTAL
SUBTRACT DRAWINGS AND THEN TOTAL
Owner’s Equity – alternate presentation
Owner’s Equity
B. Adams,Capital $ 100,000
G. Duhany, Capital 50,000
C. Mohan, Capital 60,000
Total Owner’s Equity $ 210,000
ALPHABETIC ORDER
A
Z
Current Assets
Cash $ 50,000
Accounts Receivable 30,000
Inventory 120,000
Supplies 15,000
Total Current Assets $215,000
Current Liabilities
Wages Payable $ 10,000 Accounts Payable 80,000
Other Liabilities 50,000
Current Portion - Mortgage 15,000
Total Current Liabilities $ 155,000
Fixed Assets
Land $ 200,000
Building 1,100,000
Equipment 950,000
Furniture 225,000
Vehicles 215,000
Total Fixed Assets 2,690,000
Long Term Liabilities
Vehicle Loans $ 150,000
Equipment Loan 900,000 Mortgage 850,000
Total Long Term Liabilities 1,900,000
ASSETS
LIABILITIES & OWNERS EQUITYLiabilities
Example Company
Balance Sheet
Month, day, Year
Total Liabilities $ 2,055,000Owner’s Equity
Owner’s Capital $ 750,000
Plus: Net Income 150,000 900,000
Less: Drawings ( 50,000)
Total Owner’s Equity 850,000
TOTAL ASSETS $2,905,000 TOTAL LIABILITIES & OWNERS EQUITY $2,905,000
WHO
WHEN
Acme Web Page DesignersBalance Sheet
As at March 31, 1999
ASSETS: Cash $600.00
Office Equipment 3,400.00 Total Assets: $4,000.00
=======LIABILITIES:
Bank Loan $300.00Accounts 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: $4,000.00=======
$
WHAT UNDERLINING
