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Chapter 2: The Balance Sheet

financial position ­ the status of a business or person as represented by assets, liabilities, and owner's equity (capital).

assets ­ things that are owned by a person or business.Example:

liabilities ­ things that owed by a person or business.Example:

owner's equity/capital/net worth ­ the difference between the assets and liabilities.

2.1 Financial Position Pages 18 ­ 19

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Steps to Calculating Financial Position: Page 18

Note Chris Turner Example Page 18

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The Fundamental Accounting EquationAssets ­ Liabilities = Owner's Equity

A ­ L = OE

OR

A = L + OEMost

Common Form

NOTE: Fundamental Accounting Equation is the foundation upon which ALL accounting theory is built

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Fundamental Accounting Equation for Chris Turner

2.2 The Balance Sheet Pages 21 ­ 29

Balance Sheet ­ a statement showing the financial position of a person, business, or other organization.

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Personal Balance Sheet Example Page 21

Business Balance Sheet Example Page 21

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Important Features of the Balance Sheet: Page 22• Set up in the form of the fundamental accounting equation.• Three -line heading is used.• Assets listed in order of liquidity (ease in which assets can be converted to

cash)• Liabilities listed in order in which paid.• Financial details are fully disclosed.• Final totals recorded on the same line and underlined with double line.

Accounts Receivable ­ the debts of customers; people/businesses who owe the business money.

Debtor ­ anyone who owes the business money.

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Accounts Payable ­ debts of the business; people/businesses to whom the business owes money.

Creditor ­ anyone to whom the business owes money.

Steps to Preparing a Balance Sheet: Pages 23 ­ 25Step 1­ Heading

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Step 2­ Prepare Assets Section

Step 3 ­ Prepare Liabilities Section

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Step 4 ­ Prepare Equity Section

Step 5 ­ Total Each Side of balance Sheet

Step 6 ­ Proper Placement of Dollar Signs

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Basic Record Keeping Practices: Pages 26 ­ 27• Avoid using abbreviations of names.• When using columnar paper, commas and decimal

points are omitted, cent amounts placed in final column, and, if even, a dash can be used.

• Use ruled lines appropriately.• BE NEAT!!!!

2.3 Claims Against the Assets Pages 29 ­ 32

People/groups who are entitled to the assets of a business:• owners• creditors

Why?

They have provided the funds for or purchased the assets.

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­ Note Example Page 30:

Order of possession of assets in event of a business closure:

#1 Creditors

#2 Owner

Therefore, the owner accepts any losses/profits from the sale of the assets.

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Example Pages 30 ­ 31

Before Sale of Assets:A = L + OE

After Sale of Assets:

A = L + OE

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Accounting Standards Board (AcSB) ­ the governing body which oversees Canadian accounting practice.

­ consults with many similar boards including International Accounting Standards Board (IASB).

Generally Accepted Accounting Principles (GAAPS) ­ the set of rules or standards that accountants must follow.­ Most significant section of the CICA (Canadian Institute of Chartered Accountants) Handbook.

2.4 Accounting Standards Pages 33 ­ 39

International Financial Reporting Standards (IFRS) ­ a process to replace the Canadian GAAP set by the IASB.

­ Help Canadian businesses communicate globally.

­ Required for public companies only (listed on stock exchange) starting January, 2011.

­ Private businesses usually use the Accounting Standards for Private Enterprises (ASPE) to help transition to global standards since they were developed from the traditional Canadian standards and require fewer changes.

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An basic understanding of the principles guiding accounting practices will be expected. Anyone pursuing post secondary studies in accounting will be expected to study in depth the details of the IFRS and the ASPE.

First of the basic principles:

The Business Entity Concept ­ accounting for a business organization must be kept separate from the personal affairs of the owner or from any other business or organization.

The Continuing Concern Concept (Going Concern) ­ assumes that a business will continue to operate unless known otherwise.

The Cost Principle ­ the value of the assets are to be recorded at their historical cost price.­ Revaluation model allows accountants to change the value of particular assets based on market conditions.

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Classified Balance Sheet ­ a balance sheet organized based on categories.

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Current assets ­ assets that will be used up or converted into cash within the year. Examples: Cash, supplies

Long­term assets ­ assets that will not be used up or converted into cash within the year. Examples: Buildings, equipment

Current liabilities ­ liabilities that are due within the year. Example: Accounts payable

Long­term liabilities ­ liabilities that take longer than a year to pay off. Example: Mortgage.

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Statement of Financial Position ­ a classified balance sheet that has been flipped upside down.

­ Businesses using IFRS use this format, therefore, most likely looking at a balance sheet of a public company.

­ We will be using the classified balance sheet format.

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Example Page 37