U2 L1 - Intro to Balance Sheet

U2 L1 - Intro to Balance Sheet - Introduction to the...

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Introduction to the Balance Sheet Financial position is an indication of a business' financial strength. Financial position is determined by the company's assets, liabilities, and equity, which are all included on its balance sheet. A balance sheet shows what the business owns and owes on a particular date. The Fundamental Accounting Equation To determine the financial position of an individual or business, you must: calculate its total assets – things that it owns that have a dollar value calculate its total liabilities – total debts calculate the difference between total assets and total liabilities to determine owner's equity (otherwise known as capital or net worth) Capital or owner's equity is the owner's worth in his/her business' assets. The most important law in accounting that always holds true is the fundamental accounting equation which is stated as: A = L + OE (Assets = Liabilities + Owner's Equity) You will see that we can rearrange the equation in order to calculate owner's equity (as we did above). So, another way of writing the fundamental accounting equation is: A - L = OE (Assets – Liabilities = Owner's Equity) As we can see from the above equation, owner's equity is determined by subtracting liabilities from assets. In other words, all of the assets of a business will either be financed by debt, or by the owner's personal investment in them. Therefore, total assets, less the debts incurred to purchase the assets, gives us the owner's investment in his/her assets, or owner's equity. For example, say you purchase a house worth $300,000. You make a down payment of $50,000 and take out a mortgage, from the bank, for the remainder. According to the fundamental accounting equation, your equity in the house is $50,000 and the bank has a claim on your house of $250,000 ($300,000 = $250,000 + $50,000). Let's do an example together. Dr. M. Lafarge owns and operates a medical clinic in Winnipeg, Manitoba. Following is a list of assets and liabilities for his practice. Assets . . Liabilities . Bank balance $1,200 . Bank loan $12,500 Medical supplies 3,200 . Loan from suppliers 8,900
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Medical equipment 18,750 . . . Office equipment 7,895 . . . Office furniture 5,250 . . . In order to determine Dr. Lafarge's owner's equity, calculate total assets and total liabilities, and apply these numbers to the fundamental accounting equation. A - L = OE $ 36,295 - $ 21,400 = $ 14,895 The Balance Sheet Now that you can calculate financial position, you are ready to create a balance sheet. A balance sheet is a formal financial statement that presents an individual or business' financial position on a particular date. A balance sheet for Dr. M. Lafarge, on December 31, 2005, would look like this: Dr. M. Lafarge, MD Balance Sheet December 31, 20-5 Assets Liabilities Bank balance 1 2 0 0 -Loan from suppliers 8 9 0 0 - Medical supplies 3 2 0 0 -Bank Loan 12 5 0 0 - Medical equipment 18 7 5 0 -Total Liabilities 21 4 0 0 Office equipment 7 8 9 5 - Owner's Equity Office furniture
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This note was uploaded on 07/15/2011 for the course AFM 102 taught by Professor Aa during the Summer '07 term at Court Reporting Institute of Dallas.

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U2 L1 - Intro to Balance Sheet - Introduction to the...

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