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Understanding the Balance Sheet: Assets, Liabilities, and Owner's Equity, Study notes of Agricultural engineering

An overview of financial statements, focusing on the balance sheet. The balance sheet is a financial statement that shows the amount of assets owned by a business, as well as the amount of liabilities and owner’s equity against these assets. It is a snapshot of a business's financial situation as of a particular date. The components of the balance sheet, including assets, liabilities, and owner’s equity, and provides examples of each.

Typology: Study notes

Pre 2010

Uploaded on 08/16/2009

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Balance Sheets
2
Financial Statements
Financial Statements
z
zProvide information to:
Provide information to:
The owner
Investors
Creditors
z
zThree Common Statements
Three Common Statements
Trial Balance
Income Statement (Profit & Loss)
Balance Sheet
3
Financial Statements
Financial Statements
z
zBalance Sheet:
Balance Sheet: A statement,
as of a particular date, that
shows the amount of assets
owned by a business as well
as the amount of claims
(liabilities and owner’s equity)
against these assets.
4
Financial Statements
Financial Statements
Tom Brown, Business Owner
Tom Brown, Business Owner
Balance Sheet
Balance Sheet
September 1,
September 1, xxxx
xxxx
Assets
Assets Liabilities
Liabilities
Cash…...........…$5,425
Cash…...........…$5,425
Owner’s Equity
Owner’s Equity
Tom Brown, Capital…..$5,000
Tom Brown, Capital…..$5,000
Net Income……………. 425
Net Income……………. 425
Total Liabilities &
Total Liabilities &
Total Assets…...$5,425
Total Assets…...$5,425 Owner’s Equity……..$5,425
Owner’s Equity……..$5,425
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The Balance Sheet includes:
Balance Sheet includes:
z
zAssets
Assets: Properties
(resources) of value owned
by a business (cash,
supplies, equipment, land).
6
The Balance Sheet includes:
Balance Sheet includes:
z
zLiabilities
Liabilities: Obligations
that come due in the
future.
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pf4

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1

Balance Sheets

2

Financial StatementsFinancial Statements

zzProvide information to:Provide information to:

  • The owner
  • Investors
  • Creditors zzThree Common StatementsThree Common Statements
  • Trial Balance
  • Income Statement (Profit & Loss)
  • Balance Sheet

3

Financial StatementsFinancial Statements

zz Balance Sheet:Balance Sheet: A statement, as of a particular date, that shows the amount of assets owned by a business as well as the amount of claims (liabilities and owner’s equity) against these assets.

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Financial StatementsFinancial Statements

Tom Brown, Business Owner Tom Brown, Business Owner Balance SheetBalance Sheet September 1, xxxxSeptember 1,xxxx AssetsAssets LiabilitiesLiabilities Cash…...........…$5,425Cash…...........…$5, Owner’s EquityOwner’s Equity Tom Brown, Capital…..$5,000Tom Brown, Capital…..$5, Net Income…………….Net Income……………. 425425 Total Liabilities &Total Liabilities & Total Assets…...$5,425Total Assets…...$5,425^ Owner’s Equity……..$5,425Owner’s Equity……..$5,

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The Balance Sheet includes:Balance Sheet includes:

zz^ Assets:Assets^ Properties (resources) of value owned by a business (cash, supplies, equipment, land).

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The Balance Sheet includes:Balance Sheet includes:

z z (^) LiabilitiesLiabilities: Obligations that come due in the future.

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The Balance Sheet includes:Balance Sheet includes:

zz Owner’s equityOwner’s equity: Rights or financial claims to the assets of a business (in the accounting equation, assets minus liabilities) by the owner.

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The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity

AssetsAssets –– Liabilities = Owner’s EquityLiabilities = Owner’s Equity

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The Accounting EquationThe Accounting Equation

z The equation must be in balance. z If there is an increase to the left side the right side must increase as well. z Or an increase to the left side could cause a decrease in another account on the left side.

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Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity

zz Shift in assetsShift in assets: A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same.

  • Example: z Cash is used to purchase inventory. z Both are assets – the composition has changed but the total of assets is still the same.

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Assets = Liabilities + Owner’s Equity + RevenueAssets = Liabilities + Owner’s Equity + Revenue

zz Revenue:Revenue An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash and/or accounts receivable. A subdivision of owner’s equity : as revenue increases, owner’s equity increases.

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Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity -- ExpenseExpense

zz ExpenseExpense: A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there is a decrease in owner’s equity.

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Cash vs. Accrual

z Cash Accounting -Sometimes called cash basis or cash method accounting, cash accounting records revenue and expense as they are received or paid, and does not included accounts receivable and accounts payable. z Accrual Accounting -Sometimes called accrual basis or accrual method accounting. The method of keeping records so the accounts show expenses incurred and income earned for a given period, although the expenses may not have been paid, or the income received, in the accounting period. They are accounted for as if they have been paid, or the income received. 20

Balance Sheet

  • Assets
    • Business Equipment $15,
    • Less Depreciation (4,500)
      • Total Assets $10,

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