4H1CIC Accounting - Preparing Balance Sheets PDF

# 4H1CIC - Understanding accounting information and data ## Part 2: PREPARING A BALANCE SHEET *Course responsable:* Dr. Anouar KAHLO *Associate professor:* emlyon ### Balance sheet (or statement of financial position in IFRS) - Shows the financial position of a company - at a given date (31/12 in...

# 4H1CIC - Understanding accounting information and data ## Part 2: PREPARING A BALANCE SHEET *Course responsable:* Dr. Anouar KAHLO *Associate professor:* emlyon ### Balance sheet (or statement of financial position in IFRS) - Shows the financial position of a company - at a given date (31/12 in general) | | **Balance Sheet** | |-----------------------------------|-----------------------------------| | **Assets** | **Owners' equity & Liabilities** | | ▪ Use of funds | ▪ Source of funds | | ▪ How the money is spent | ▪ Where does the money come from | ### Assets - Three basic characteristics: - Economic resources - Controlled by the business - Expected to benefit future operations - Two categories of asset: - **Fixed Assets** (or non-current assets): items intended for use in the company's activities over the long term (assets held > 1 year) - **Current Assets:** those assets of the company which are frequently renewed (assets held < 1 year) ### Liabilities - Financial obligations or debts - Represent negative future cash flows - The person or organization to whom the debt is owed is called a *creditor* - Usually listed on the balance sheet in the order in which they are expected to be repaid - Three categories of liability: - Short term liabilities - Long-term liabilities, and; - Contingent liabilities ### Owners' Equity - Represents the owners' claims on the net assets of the business. - Indicates a residual amount as creditors have legal priority over owners. - Entitles owners to the residual assets once creditors have been fully paid. - Always equal to total assets minus total liabilities ### Increases in Owners' Equity The owners' equity in a business comes from two primary sources: - Investments of cash or other assets by owners. - Earnings from profitable operations of the business. ### Decreases in Owners' Equity Decreases in owners' equity also are caused in two ways: - Payments of cash or transfers of other assets to owners. - Losses from unprofitable operations of the business. ### French presentation | | **Actifs (Asset)** | **Passifs (Owners' Equity Liabilities)** | |-----------------------------------|--------------------------------------------------------------------------|---------------------------------------------| | *From the less liquid to the more liquid* | **Fixed Assets** (Land, Property, Equipment) | - Equity | | | **Current assets** - inventories - Accounts receivable - Cash | - Retained Earning | | | | - Earning (+ ou -) | | | | **Liabilities** - Accounts payable | | | | - Notes payable | | | **TOTAL ACTIF** | - Loans | | | | **TOTAL PASSIF** | ### US presentation | | **ASSETS** | **Liabilities and Owners' Equity** | |-----------------------------------|-----------------------------------------------------------------------------------------|-------------------------------------------------------------------| | *From the more liquid to the less liquid* | **Cash** - Accounts receivables - Inventories - Land, Property, Equipment - **TOTAL ASSETS** | **Liabilities** - Accounts payable - Notes payable - Loans - **Owners' Equity** - **TOTAL Liabilities & Owners' Equity** | *IFRS accept both presentations* ### BASIC EQUATION OF ACCOUNTING  **LIABILITIES + OWNERS' EQUITY** ### Balance Sheet - fundamental equation **We must always have:** **ASSETS = LIABILITIES + OWNER’S EQUITY** **Therefore:** - Assets – Liabilities = Shareholders' Equity (1) or - Assets = Liabilities + Shareholders' Equity (2) **Two views of shareholders' equity:** - (1) Residual value = Net book value of the company - (2) Part of liabilities = Debt with respect to the shareholders ### Some key points - Both sides of the business equation must always be balanced with one another - Any transaction that only affects the structure of the balance sheet is not source of value creation - At least 2 parts: 1 source of funds, 1 destination (or use of funds): **double entry system**. - One account for each type of posting ### Impact of most common transactions | Example | Assets | Liabilities | Shareholders' equity | |:------------------------------------------------------------------------|:------|:-----------|:---------------------| | Creation of the company by capital contribution | + | | + C | | Purchase of equipment for cash | + | - | | | Purchase of equipment on credit | + | + | | | Sales revenue for cash or on account | + | | + E | | Collection of accounts receivable | + | | | | Expense for cash | - | | - E | | Expense on account | | + | - E | | Payment of a liability (e.g., accounts payable) | | - | | | Obtaining a loan (recording of a debt) | + | + | | | Repayment of a debt | - | - | | | Conversion of a debt into share capital | | - | + C | | Reduction of capital (repayment of the capital) | - | | - C | *The shareholders' equity account is separated between: C = capital and RE = earnings*