Chapter 1 The Balance
Sheet
BAF 3M
F I N A N C I A L A C C O U N T I N G F U N D A M E N TA L S
The Accounting Equation
Assets = Liabilities + Owner’s
Equity
This fundamental accounting equation
provides us with a snapshot of the financial
position of a company!
Assets & Liabilities
What are Assets?
Anything that a business (or person) owns of
value.
What are Liabilities?
Anything that a business (or person) owes of
value.
Therefore:
Assets = Owns
Liabilities = Owes
Examples of Assets
Cash ($ in the bank)
Accounts Receivable
$ that is owed to you by customers – your money in
someone else's hands
Equipment
Cars
Computers
Furniture (desks, chairs, cubicles)
Factory
Building
Land
• A business owns these!
Examples of Liabilities
Bank Loan
Credit Card Debt
Accounts Payable
Wages Payable
Salaries Payable
Mortgage Payable
Note: “Payables” are amounts that you owe to
another business (e.g., bank, employees,
supplier)
• A business owes these!
Owner’s Equity
Net worth of a business
Difference between assets and liabilities
For now, we will use only one owner’s equity
account – Capital
Recall A = L + OE
We can rearrange this equation as: OE = A – L
If A > L, a business has a positive net worth
If A < L, a business has negative net worth
Account Type Activity
You will get a card with an account
Your goal is to place yourself in the correct
category...
Are you an Asset, Liability or Owner’s Equity?
Once everyone has his or her account, go to
the place in the room where you belong –
Asset, Liability, Owner’s Equity
Can you get to the right place in less than 20
seconds?
The Balance Sheet
(page 7 of text)
Step 1 – Prepare Headings
Line 1 – Who?
Line 2 – What?
Line 3 – When?
Note: ‘When’ is a specific date – a ‘snapshot’
Step 2 – List Assets on Left Side
Put Assets in order of Liquidity
Liquidity means how fast the assets can be
converted into cash
The Balance Sheet
(page 7 of text)
Step 3 - List Liabilities on Right Side
Put Liabilities in order of Maturity
Maturity means that the bills (or accounts) that
are due first are listed first
Step 4 – Calculate Owner’s Equity & List on
Right Side
Step 5 – Make sure that your Total Assets
(left side) and your Total Liabilities &
Owner’s Equity (right side) balance
Balance Sheet ‘Rules’
$ included at top of each column and at final
total
Single underline indicates a math
calculation will occur
Double underline indicates a final total
No abbreviations
A = L + OE → Total Assets and Total
Liabilities & Owner’s Equity are on the same
line (thus, it balances!)
Sample Balance Sheet
Proper Balance Sheet Order
Liquidity Order Maturity Order
Cash: most liquid Accounts Payable:
Accounts due within 30 days
Receivable: paid Bank Loan: usually
within 30 days 1-5 years
Land, Building, Mortgage: usually 25
Equipment: longer years
term assets – longest
life remaining listed
first
Balance Sheet Order Game
You will receive one card with an account or
title or subtitle on it
Working with the rest of the class, you must
build a Balance Sheet – properly formatted
– on the board
Our goal: accurate Balance Sheet in less than
2 minutes
