Chapter 2:

The
Balance Sheet
1
The Balance Sheet

Financial Position

2
 Financial Position
 One of the most important uses
of accounting data is to show the
Financial Position of a person, a
business or an organization
 What do you think would go into
the determination of Financial
Position?

3
 Financial Position
 Things you own
These are called ASSETS
 Things you owe … your debts
These are called LIABILITIES
 Calculate the difference between total
ASSETS and total LIABILITIES
This difference is called CAPITAL or the
OWNER’S EQUITY or NET WORTH

4
Financial Position
Things you own … Things you owe …
___________________ $_________ ___________________ $_________
___________________ _________ ___________________ _________

___________________ _________ ___________________ _________

___________________ _________ ___________________ _________

___________________ _________ ___________________ _________

Total Assets $ Total Liabilities $

Capital, Equity or Net Worth …

= Total Assets – Total Liabilities
= $______________ – $______________
=$ 5
 Fundamental Accounting
Equation
 It may be stated as …
A – L = OE
(Assets – Liabilities = Owners’ Equity)
 Or the more traditional way is …
A = L + OE
(Assets = Liabilities + Owner’s Equity)

6
The Balance Sheet

Features

10
The Balance Sheet

$
$

$ $ 11
Fundamental Accounting Equation

L+
$
$

A = $

OE$ $ 12
Assets
Liquidity – the
order in which
the assets are
Listed converted into
$

in cash $

order
of $

liquidity
$ $ 13
Assets Accounts Receivable
• List of customers who
purchased goods or
services but will pay at
a later date.
$
$

$ $ 14
Assets Accounts Receivable
• List of customers who
purchased goods or
services but will pay at
a later date.
$
• They are in debt to the
business. $

$ $ 15
Assets Accounts Receivable
• List of customers who
purchased goods or
services but will pay at
a later date.
$
• They are in debt to the
business. $

• Anyone who owes

money to the business
is a debtor. $

$ $ 16
Assets Accounts Receivable
• Abbreviated as A/R.

$
$

$ $ 17
Assets Accounts Receivable
• Abbreviated as A/R.
• Names of customers
are listed in
alphabetical order by
$ last name.
$

$ $ 18
Assets Accounts Receivable
• Abbreviated as A/R.
• Names of customers
are listed in
alphabetical order by
$ last name.
• Listed after cash …$
as
A/R are usually
collected within 30$
days

$ $ 19
Assets
The orderand
Supplies shownlong-here
term
is whatassets
you will
are see
listedin
last text
the as they
book.are not
$
typically
The properconverted
order isto to
cash
list them
but in
arethe
used
order
$in

the operation
they will get … of the
business.
“used up”. $

$ $ 20
Liabilities
Listed
in order
of when
$ they are
$
normally
paid
$

$ $ 21
 Liabilities
Accounts Payable
• List of suppliers who
the company
purchased goods or
services from but $will
pay at a later date. $

$ $ 22
 Liabilities
Accounts Payable
• List of suppliers who
the company
purchased goods or
services from but $will
pay at a later date. $

• They are amounts

owed to creditors.
$

$ $ 23
 Liabilities
Accounts Payable
• List of suppliers who
the company
purchased goods or
services from but $will
pay at a later date. $

• They are amounts

owed to creditors.
• A creditor is anyone to $

whom the business

owes money.
$ $ 24
 Liabilities
Accounts Payable
• Abbreviated as A/P.

$
$

$ $ 25
 Liabilities
Accounts Payable
• Abbreviated as A/P.

• Individual creditors
are listed $
$
alphabetically.

$ $ 26
 Liabilities
Accounts Payable
• Abbreviated as A/P.

• Individual creditors
are listed $
$
alphabetically.
• Listed first in the list
of liabilities as they $
are typically paid
within 30 days.
$ $ 27
Owner’s Equity
• Listed separately from liabilities.

$
$

$ $ 28
Owner’s Equity
• Listed separately from liabilities.
• Show the owner’s name plus
the word “Capital”.
$
$

$ $ 29
Owner’s Equity
• Listed separately from liabilities.
• Show the owner’s name plus
the word “Capital”.
• This figure is the difference
between$ total assets & total
liabilities. $

$ $ 30
The Balance Sheet

Formatting
Conventions
31
Formatting
Title …
who, what,
& when.
$
$

$ $ 32
The Title
H O the
W of e s s, WH
T h e
m
na busin
l,
e Th e
n
A T
d u a a t ion Fina a me
vi iz n c ia o
i n d i r or g a n l Sta f the
o tem
ent
$ WHEN
The date on which $
the financial position
is determined

$ $ 33
Formatting
Sub-headings …
Write and underline sub-headings for
Assets, Liabilities, & Owner’s Equity.

$
$

$ $ 34
Formatting
Single ruled line
before all sub-
totals & totals.

$
$

$ $ 35
Formatting
Double ruled
line after all
totals.
$
$

$ Totals on the same line $ 36

Formatting
Dollar signs ($) are A dollar sign ($) is
placed with the first also used beneath
amount in every each single-ruled
column line
$
$

$ $ 37
 Formatting
Use Notice
columnarthepaper
columns to keep
... figures
thousands – hundreds – aligned.
tens – single dollars - cents
Even dollar
amounts may $ Notice,
be shown as decimals and $

commas are
“00” or “–” in not used. $
the cents
column.
$ $ 38
The Balance Sheet

Claims Against The

Assets
42
Claims against the Assets

Claims of the Creditors

$
$

Claims of the Owner

$ $ 43
Claims against the Assets

 Why do creditors and owners have a

claim on assets?
They have either provided the funds
used to acquire the assets or
They have provided the assets
themselves

44
Claims against the Assets

 Who has first claim to the assets?

If the business is closed down, the
claims of the creditors are settled first
The owner must accept any losses
from the sale of the assets but may
also benefit from any profits

45
The Balance Sheet

Accounting Standards

48
- The Accounting Standards Board (AcSB) consults
with other organizations such as the International
Accounting Standards Board (IASB) to make
decisions about accounting standards.
- In 2006 they decided that GAAPs (Generally
Accepted Accounting Principles) would be changed
to International Financial Reporting Standards
(IFRS)
- Since 2011, private businesses (businesses not
listed on stock exchanges) may choose IFRS or
ASPE (Accounting Standards for Private
Enterprises) to govern heir accounting practices.
- All businesses must diligently follow an accounting
standard practice.
Business Entity Concept
The business entity concept provides that the
accounting for a business organization must be
kept separate from the personal affairs of its
owner, or from any other business or organization.

What does this mean?

 The owner of the business should not place any personal
assets, such as the family home, on the business balance
sheet.
 The balance sheet must reflect the financial position of the
business alone.
 Any personal spending of the owner are charged to the
owner. 51
Continuing Concern Concept
The continuing concern concept assumes that a
business will continue to operate and use up its
assets.

What does this mean?

 It is assumed that the business will continue to operate for an
indefinite period of time. Consequently, the assets of the
company will continue to be used for their intended purpose
and would be valued at their original cost

52
The Cost Principle
The cost principle requires accountants to record
the value of assets at their purchased, historical
price.

What does this mean?

 We are not concerned about the market cost of the
items on the balance sheet because we know their
original cost.
 This relates to the continuing concern concept because we do
not need to know the market value, as the business will
continue to operate and use up its assets (i.e. supplies).
52
The Revaluation Model
The revaluation model is an IFRS standard that
allows accountants to change the value of
particular assets based on market conditions.

Which assets might this apply to most?

53
Classified Balance Sheet

Current Liabilities
Current Assets

Long-term Liabilities

Long-term Assets

Equity
 Classified Balance Sheet

1. Current Assets - Assets that will be converted to cash or

used up in one year.
2. Long-Term Assets - Assets that last longer than one year.
3. Current Liabilities - Due within one year.
4. Long-Term Liabilities - Take more than one year to pay off.
Balance Sheet Statement of Financial Position
(IFRS)

Equity
Long-term Assets

Long-term Liabilities

Current Assets
Current Liabilities