535handout_3 - IS/PM 535 Handout #3 Financial Statements...

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1 IS/PM 535 Handout #3 Financial Statements Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basices, by Wayne A. Label, Sourcebooks 2006. Printable copy from DePaul 24x7 books for instructional use. Chapter 3: The Balance Sheet and Its Components Understanding the Balance Sheet Imagine that you make a list of everything that is important to you. Along with this list you attach values to all of these items. Then you make a list of everything that you owe to others, and again you attach values to these items. Then you subtract the total value of the second list from the total value of the first. Voila! You have just created the basic components of a Balance Sheet. In a business, the first list of items is called Assets. Assets are valuable resources owned by the business and can be either short- or long-term in nature. Your second list of items is called Liabilities. Liabilities are what you owe to others for resources that were furnished to the business. The parties to whom the company owes money are normally called creditors. The creditors are said to "have a claim against the Assets." Figure 3.1 illustrates the origin of some Liabilities a company or individual might incur. What They Are Called Where Liabilities Originate Accounts payable Purchase of items Wages payable Services from employees, not yet paid Utilities payable Utilities used, not yet paid for Notes payable IOUs Rent payable Unpaid rent Figure 3.1: WHERE DO LIABILITIES COME FROM? Your third list can be labeled Owner's Equity. Owner's Equity reflects the amount the owner has invested in the firm. There are two sources of Owner's Equity: The amount of money provided directly by the owner or other investors, called Owner's Investment; and, The amount retained from profits, called Retained Earnings. Profit takes many forms: Profits are not always cash; profit can be made up of promises to pay money as well. For example, when there is a sale for a receivable, there will be Revenue, but no cash coming into the company. The money will come in during a later time period but can be considered profit for the company. Let's look at an example. The Solana Beach Bicycle Company is a small business that makes, repairs, and sells bicycles. The company was started by Samantha Fernandez in January 2006. Sam (as all of her friends call her) has been an avid bike rider for many years and always felt she could build a "better mouse trap" or bicycle, that is. Sam invested some money she had saved and some that she had inherited into her business. Take a look at the bicycle company's Balance Sheet in Figure 3.2 . This is a proprietorship, because Samantha is the sole owner of the company. The Balance Sheet would look a little different for a corporation. These differences are discussed in chapter 7 . (See Appendix B for a real-life example of a Balance Sheet from Station Casinos, Inc.) Balance Sheet December 31, 2006 Assets Cash $17,385
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2 Balance Sheet December 31, 2006 Assets
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This note was uploaded on 10/11/2011 for the course ECT ect535 taught by Professor Susichan during the Fall '11 term at DePaul.

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535handout_3 - IS/PM 535 Handout #3 Financial Statements...

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