Principles of Accounting Chapter 1 The Balance Sheet

What is Accounting? • The language of business • Two purposes of Accounting: – Record day to day financial activities of a business – Summarize and report information in financial statements for analysis and decision making

Terminology • Assets are items of value owned by a business • Liabilities are debts owed by a business • Equity is the net worth of a business • Fundamental Accounting Equation: • A = L + E or A – L = E • Example, if A = $50 000, L = $20 000 – Equity is $30 000

IFRS • International Financial Reporting Standards • Standard accounting rules and guidelines • Business Entity Principle: – Each business a separate entity and financial data for business be kept separate from owner’s personal financial data • Cost Principle: – Assets must be shown at acquisition cost

Balance Sheet • Formal statement showing the financial position of a business at a certain date who what when Short tem assets listed in terms of liquidity Single lines imply addition or subtraction Long term assets listed by length of life Dollar signs on top of all columns and below any line Double underline all major totals

Transactions • A business transaction is an exchange of things of value • Accounts represent those items of value • A promise to do something later and then get paid is not a transaction • A = L + E must be in balance before and after every transaction • Accounting periods vary with size of business and reflect summary of transactions

Transactions Cash 1000 Assets A/R Off. Supp. Equip. Auto = 500 300 10000 15000 $26800 Liabilities + Owner’s Equity A/P Loan J. Wee, Capital 2000 5000 19800 $26800 Buy $200 Office Supplies for Cash - 200 800 500 +200 500 10000 15000 $26800 2000 5000 19800 $26800 Purchase $1000 of Equipment “on account” 800 500 +1000 15000 $27800 +1000 3000 5000 $27800 19800

Transactions Cash 800 A/R 500 Assets Off. Supp. Equip. Auto = 500 11000 15000 $27800 Liabilities + Owner’s Equity A/P Loan J. Wee, Capital 3000 5000 19800 $27800 Owner withdraws $200 cash for personal use -200 600 500 11000 15000 $27600 3000 5000 -200 19600 $27600 Company makes a $5000 sale, receiving $3000 in cash and owed the remainder +3000 +2000 3600 2500 11000 15000 $32600 +5000 24600 3000 5000 $32600 Company pays $1500 to bank to reduce loan -1500 2100 2500 $311000 15000 -1500 3000 3500 $31100 24600