Principles of Accounting
Chapter 1
Unit 1
Mrs. Joudrey
Personal Net Worth
• Personal Net Worth = Total Value of Items
Owned – Total Amount Owed to Creditors
• Ask Students “What are you worth” – do a
few examples using headings Own, Owe,
Worth.
Net Worth
• Change the headings to Assets,
Liabilities, and Net Worth
• Assets - are items of valued owned by the
company
• Liabilities - are the debts of a business or
a person
• Net Worth - is what the person or business
is worth (assets-liabilities)
Assignment
• Please complete:
• questions 1-3 page 12
• exercise 1 page 12
Balance Sheet Equation
• Assets = Liabilities + Owner’s Equity
• $10 000 = $6 000 +
?
• What is the owner’s claim against the
assets?
Balance Sheet Heading
• Who? (name of the business)
• What? (what report you are creating ex.
Balance sheet)
• When? (what period of time or what day
do these numbers reflect ex. September
30, 2011)
A = L + OE
•
•
•
•
•
a)
b)
c)
d)
e)
A
$10 000
$25 000
$30 000
$18 000
$100 000
=
=
=
=
=
=
L
$4 000
$7 000
$?
$?
$40 000
+
+
+
+
+
+
OE
$?
$?
$10 000
$12 000
$?
In Your Textbooks
• Note Lara Chari’s Personal Balance Sheet
on page 4
Assignment
• questions 4 and 5 page 12
• exercises 2 and 3 page 12
Purpose of Accounting
• Purpose of accounting is to provide
financial information for decision making.
• (imagine if I had a business where five
people are employed and we make Tshirts, if I wanted to sell my business to
you I would have to figure out how much it
is worth and hopefully get close to that
amount when I sell it)
The 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.
• (If I owned a business and I purchased a
cottage on a late in Ontario I could not
record this with the information for the
business I run – they are separate).
Balance Sheet
• A balance sheet is a financial statement
that lists the assets, liabilities, and owner’s
equity at a specific date.
Owner’s Equity
• Owner’s equity is the owner’s claim against the
assets of a company.
• (Why do people start businesses? To make
money – well that is what the owner’s equity is
like – it’s like the amount that the owner could
take out of the company if they wanted to.
Owner’s don’t always take everything out,
because you need money to make money – to
buy supplies etc.)
Example of a Balance Sheet
Note the Following on the Balance
Sheet
• Heading
• Subheading
• Dollar signs (line up, beside first figure and final
total on both sides)
• Numbers lining up
• Totals at the end line up
• Single lines
• Double lines
• Order of items within each category
• A=L+OE
Balance
• Balance Sheet (both sides balance out,
the equal the same amount)
• Receivable (you will get it – you will
receive it)
• Payable (you will pay it)
Balance Sheet Heading
• Who – Business name (Goldman’s Gym)
• What – Statement name (Balance Sheet)
• When – Statement date (June 30, 2010)
Listing Assets
• Assets go on the left side of the page
• Do not total up assets until the other side
is completed since the totals for both sides
must be recorded on the same line.
Therefore blank lines might need to be
inserted before the line total assets can be
completed.
Listing Liabilities
• Liabilities go on the right side of the page
• The total can be done right away since
Owner’s Equity still needs to be recorded
below the liabilities.
Owner’s Equity
• Owner’s Equity is listed on the right side of
the page under total liabilities
• Make sure the total liabilities + owner’s
equity and total assets are on the same
line
Assets
• Assets – things of value owned by the
business
• Examples: Cash, Accounts Receivable
(amount other people or businesses owe
you – amount due from debtors
(customers). They have purchased
something from you on credit and will pay
you at a later date, Office supplies (items
purchased for use within the office)
Liabilities
• Liabilities – the debts of the business
(what the business owes)
• Examples: Accounts Payable (amount
owed to creditors for the purchase of
goods or services by the business) –
money the business owes to another
business or to someone else, Bank Loans,
Mortgage payable
Equities
• Equities – claims against the assets of a
company. What the owner has claim to
(the remaining value of the company after
all the liabilities are paid off). This is what
the company is “worth to the owner”.
• OE = A – L
Order of Items on a Balance Sheet
• Assets
• There are two types of assets – long term and
short term
• Short term assets are listed in order of liquidity
(the order in which assets would likely be
converted to cash – how easy something can be
turned into cash) example: cash would go first
then accounts receivable, then office supplies….
Order of Items on a Balance Sheet
• Assets
• Long term assets are listed in the order of
useful life to the business starting with the
longest lasting one first. Example: land
then building then transportation
equipment.
Order of Items on a Balance Sheet
• Liabilities
• Liabilities are listed according to when
they must be paid in full, from the shortest
to the longest. Payment due dates are
known as the maturity date. So whatever
needs to be paid off first goes first under
liabilities etc.
Valuation of Items on the Balance
Sheet
• Cost Principle – Assets are valued
according to the cost principle. The
amount that was paid for the asset is the
amount that is listed on the balance sheet.
This amount will never increase even if the
actual “value” of the asset is more than
what is listed.
People who Could use a Balance
Sheet to Obtain Information:
• Owner of the business
• Creditors – companies that might lend that
business some money or give out items or
services on credit.
• Investors – they will want to know the
financial position of a business before
investing in it.
• Government – statistical information,
taxes, decision making.