Chapter 1- THE BALANCE SHEET Flashcards
Calculating net worth, preparing a balance sheet, recording transactions
Business entity concept
When doing financial information, you must never include any that doesn’t affect the business such as including the mortgage of the owners house. The mortgage of the business would be included because it directly affects the business.
Cost principle
The cost price of Illiquid (capital assets) assets at the time they were purchased
Fair value principle
The amount an asset could be sold for today. The current market value.
Accounts Receivable
Customers owe us money for a service we provided that was done on credit. The customers are debtors and AR would be an asset. Due within 30 days.
Ex. Painting company billing clients after they painted the house.
Accounts payable
Money a company or business owes to the vendors (creditors) who supply goods or a service. This is a liability and can take up to 30 days.
Ex. A jewlery business owes the vendors money for supplying chains and earrings.
Asset and the different forms of an asset
Provides value to a business or person and can come in the form of products, resources, and services
Ex. Cash, supplies, equipment, land, building
Liquid assets: can be converted into cash quickly (ex. Stocks, cash)
Illiquid assets (capital assets): cannot be easily converted into cash (ex. A house or car)
Investment asset: tangible and intangible items that investors can buy and sell to earn additional income and value. (Ex. Real estate, bonds, retirement savings account)
Liability
When a business or person owes money to creditors, which reduces value of the assets.
Ex. Accounts Payable, mortgage, bank loan, owed to creditors, taxes
How to calculate net worth
You must subtract what you owe from what you owe which will give you a product of money known as your net worth (or owners equity).
Assets-Liabilities=Net Worth (OE)
Assets=Liabilities + OE
How do you know when a company is in a better financial position?
The company’s liabilities are smaller than another. Meaning that they have less debt which increases the value of the company (worth more).
Owners Equity! And how does a business create value or equity?
The net worth or value of the business. Shows the owners investment or capital in the business.
You generate value/equity by making a profit (increase in OE due to successful business operations)
Ex. Capital, owners investment in the business
Depreciating asset vs. Appreciating asset
Depreciating asset: the asset goes down in value
Appreciating asset: the asset goes up in value
On account/on credit
Owe money but didn’t pay cash
Public companies
Must use IFRS when doing balance sheet
Private companies
Can use either ifrs or aspe
Business Transaction:
Something of value is given, something of value is recieved
Analyzing a transaction
- What accounts change in value (at least 2).
Compound entry- more than 2 accounts changing
- By how much do they change
- Accounts increase/decrease
- After transactions are recorded, does the equation balance out (A=L+OE)
