Principles of Accounting Chapter 1

Unit 1Mrs. 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 = L + OE• a) $10 000 = $4 000 + $?• b) $25 000 = $7 000 + $?• c) $30 000 = $? + $10 000• d) $18 000 = $? + $12 000• e) $100 000 = $40 000 + $?

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 T-shirts, 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.