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Learning Goals Let’s turn the following curriculum expectations into student friendly learning goals. 1 prepare a trial balance and the financial statements for a service business apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business A...
Learning Goals Let’s turn the following curriculum expectations into student friendly learning goals. 1 prepare a trial balance and the financial statements for a service business apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business Accounting 1, 7th edition The Balance Sheet Accounting 1,27th edition 2 Agenda Vocabulary Success Criteria 2.1 Financial Position 2.2 The Balance Sheet 2.3 Claims against the Assets 2.4 Accounting Standards 2.5 A Spreadsheet for Balance Sheets 3 Accounting 1, 7th edition Vocabulary Accounts payable Accounts receivable Assets Balance sheet GAAP Capital Classified balance sheet Current asset/liability 4 Accounting 1, 7th edition Equity Financial position Accounting equation Liability Liquidity Long-term asset/liability Owner’s equity Success Criteria (1) Understand what is meant by financial position (2) Prepare a simple and classified balance sheet (3) Define account receivable and account payable (4) Rearrange the fundamental accounting equation (5) Explain claims against assets (6) Define liquidity 5 Accounting 1, 7th edition Section 2.1 FINANCIAL POSITION 6 Accounting 1, 7th edition Financial Position 7 One of the most important uses of accounting data is to show the financial position of a person, business or other organization. The Financial Position of a business is the status of the business based on its assets, liabilities, and owner’s equity. Accounting 1, 7th edition Calculating Financial Position To calculate financial position we will use the following 3 step process: 8 1. List and total the things that you own that have dollar value. These are known as assets. 2. List and total your debts. These are called liabilities. 3. Calculate the difference between total assets and total liabilities. This difference is called equity. Accounting 1, 7th edition Group brainstorm 9 In your group, write down a list of all the different types of Assets Liabilities Accounting 1, 7th edition Let’s work on Section 2.1 Exercises #1-3. 10 Accounting 1, 7th edition Extension: Formal definitions from Reporting Framework IAS Reference: https://www.iasplus.com/en/standards/other/framework (chapter 4) Unfortunately, those definitions are a bit… simple… So here are the ACTUAL proper (grown-up) definitions Definitions of the elements relating to financial position Asset. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. [F 4.4(a)] Liability. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. [F 4.4(b)] Equity. Equity is the residual interest in the assets of the entity after deducting all Accounting 1, 7th edition 11 its liabilities. [F 4.4(c)] Mini Case studies: 1. Mr Chris buys a car to drive in the weekends from a Hyundai dealership , paying cash and receiving a receipt. Is this an asset? 2. Isaac gives his Macbook to Karan in class, now Karan’s asset? 3. Aagam gives Swayam $1,000 – is this considered a liability for Swayam? 4. Aaagam gives Swayam $1,000 so Swayam can start selling merch as a side hustle – is this considered a liability for Swayam? (ignoring it’s a mac and therefore will NEVER be an asset), is the macbook (innit bruh) 5. DSC leases this building from the owners (Giant HK Company Ltd) for 15 years. Can it be considered an asset? And is there an ongoing liability? 6. Are the staff of DSC an asset – can they be recorded on the Balance Sheet? 12 Accounting 1, 7th edition The Fundamental Accounting Equation The previous section showed that total assets minus total liabilities equals equity. This relationship is always true and can be written in the form of an equation. The fundamental accounting equation is extremely important in the study of accounting. It is the basis on which accounting theory is built. 13 Accounting 1, 7th edition Work on Section 2.1 Exercises #4-6. 14 Accounting 1, 7th edition Read Case 1 on Page 51 and respond to the question at the end of the case. Also, comment and the financial position of each person. (100 words) 15 Accounting 1, 7th edition Section 2.2 THE BALANCE SHEET 16 Accounting 1, 7th edition The Balance Sheet A balance sheet is a statement showing the financial position of a person, business, or other organization. The balance sheet is set up in the form of the fundamental accounting equation. A = L + OE (Assets = Liabilities + Owner Equity) 17 The assets appear on the left side, and the liabilities and the owner’s equity appear on the right side. Accounting 1, 7th edition Another way of looking at A=L+C (or the Balance Sheet) Use of funds – Assets Sources of funds – Liabilities/Capital (Bank, vehicles, furniture, equipment, plant, premises, etc) (Loans, overdrafts, leases, mortgages, owner’s investments, retained earnings 18 Accounting 1, 7th edition Preparing a Balance Sheet STEP 1 Write in the statement heading on columnar paper as shown. WHO: the name of the business WHEN: the date of the statement 19 Accounting 1, 7th edition WHAT: the name of the statement Preparing a Balance Sheet STEP 2 Write the subheading “Assets” at the top of the left-side column. Then write the individual asset accounts on the left side. Subheading Amounts in money column Do not enter total assets figure at this time 20 Accounting 1, 7th edition The assets are listed in the order of their liquidity. How easily they can be converted into cash. Preparing a Balance Sheet STEP 3 Write the subheading “Liabilities” at the top of the right-side column. Then write the individual liability accounts on the right side. Subheading The liabilities are listed in the order in which they are normally paid. Single ruled line before the total The total of the liabilities is entered at this time 21 Accounting 1, 7th edition Preparing a Balance Sheet STEP 4 Beneath the liabilities, write in the subheading “Owner’s Equity” Subheading The name of the owner and the word “Capital” 22 Accounting 1, 7th edition Preparing a Balance Sheet STEP 5 Complete the balance sheet by writing in the final totals as shown. 23 Accounting 1, 7th edition Preparing a Balance Sheet STEP 6 Notice the dollar sign is placed with the first amount in every column and for each total. 24 Accounting 1, 7th edition Read Pages 26-27 for more precise formatting tips. 25 Accounting 1, 7th edition Prepare a Balance Sheet (Handout) Date: Sept 15, 2014 Bank Loan: $3000 Accounts Receivable: $4000 Furniture: $2000 Equipment: $2000 Company Name: ABC Wallets Accounting 1, 7th edition Cash: $2000 Building: $15,000 Name of Owner: H. Simpson Mortgage Payable: $5000 Accounts Payable: $3000 Let’s work on Section 2.2 Exercises #1 together. 27 Accounting 1, 7th edition Section 2.3 CLAIMS AGAINST THE ASSETS 28 Accounting 1, 7th edition Claims against the Assets The business lists its assets on the left side of the balance sheet. Who is entitled to these assets? The answer is shown on the right side of the balance sheet. That is both the creditors and owner have claim on the assets. Creditors have claim because they either provided the funds used to acquire the assets, or they have provided the assets themselves. The claims of the creditors will always be settled first. 29 Accounting 1, 7th edition Claims against the Assets The balance sheet below clearly shows all the businesses assets and who has the right to claim them. 30 Accounting 1, 7th edition Let’s read Page 31 and complete Section 2.3 Exercise 1 together. 31 Accounting 1, 7th edition Exercise #1 Assets Bank 900 A/R 1,050 Supplies 500 Property 180,000 Equipment 2,000 Boats 20,350 Total Cash: 204,800 32 Accounting 1, 7th edition Liabilities Bank Loan 18,000 A/P 3,740 Mortgage 80,000 Liquidator Charges 1,500 Total Liabilities: 103,240 Cash Received 204,800 – 103,240 = $101,560 Section 2.4 ACCOUNTING STANDARDS 33 Accounting 1, 7th edition Accounting Standards In performing their work, accountants throughout the world follow sets of rules or standards. These standards are made available in the CICA Handbook. The most significant sections of the handbook contain the Generally Accepted Accounting Principles (GAAP) In 2006 a process to change Canadian GAAP with the International Financial Reporting Standards was announced. The number of countries that have adopted IFRS is well over 100 with more joining this globalization trend. 34 Accounting 1, 7th edition Generally Accepted Accounting Principles To build functional awareness of accounting standards, you will be introduced to various principles as they relate to the topics in this text. The first 4 concepts you will be introduced to are: 1. Business Entity Concept 2. The Cost Principle 3. The Continuing Concern Concept 4. The Revaluation Model 35 Accounting 1, 7th edition Generally Accepted Accounting Principles Business Entity Concept Is a long standing principle that keeps the accounting for a business separate from the personal affairs of the owner. The Cost Principle Requires accountants to record the value of assets at their historical cost price. 36 Accounting 1, 7th edition Generally Accepted Accounting Principles The Continuing Concern Concept The principle assumes that a business will continue to operate unless it is know that it will not. The Revaluation Model Outlines an accounting procedure that allows accountants to change the value of particular assets based on market conditions. 37 Accounting 1, 7th edition Balance Sheet Formats The Classified Balance Sheet 38 Accounting 1, 7th edition The Classified Balance Sheet Current Assets Cash and assets that will be converted into cash within one year. Or assets that will be used up within one year. Long-term Assets These assets last longer than one year. Current Liabilities Are debts that are due within one year. Long-term Liabilities Are debts that take longer than one year to pay off. 39 Accounting 1, 7th edition Complete Section 2.4 Exercise 1AB on your own. 40 Accounting 1, 7th edition