Businesses refer to this relationship as the accounting equation or the balance

Businesses refer to this relationship as the

This preview shows page 106 - 111 out of 164 pages.

Businesses refer to this relationship as the accounting equation, or the balance sheet equation. Balance Sheet Equation Assets = Liabilities + Equity Resources a business controls Claims of others on resources Your claim on resources
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Introduction to Business BBI2O-B Lesson 9, page 11 Copyright © 2008 The Ontario Educational Communications Authority. All rights reserved. Ellen and Ramón’s Equity in the Lemonade Stand What portion of the business is owned by Ellen and Ramón? Figure it out. They own Current Assets Totals Cash $3 000 Product Inventory 550 Supplies Inventory 300 Total Current Assets $3 850 Fixed Assets Equipment 550 Lemonade Cart 1 500 Total Fixed Assets $2 050 Total Assets $5 900 They owe Current Liabilities Accounts Payable: Sharpe Wholesalers $500 Total Current Liabilities $ 500 Long-Term Liabilities Bank Loan $3 000 Total Long-Term Liabilities $3 000 Total Liabilities $3 500 Their equity is Owner’s Equity Ellen and Ramón’s equity $2 400 [Assets – Liabilities] Total Liabilities and Owner’s Equity $5 900
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Lesson 9, page 12 Introduction to Business BBI2O-B Copyright © 2008 The Ontario Educational Communications Authority. All rights reserved. Ellen and Ramón own $2400 worth of their business debt-free, which is more than half. Notice also how the total assets equal the total liabilities and owner’s equity? They are in balance (hence the name “balance sheet equation”). Support Question (do not send in for evaluation) 20. Provide a short explanation and an example (or a formula) for each of the following: Term Brief Explanation Example current asset current liability equity long-term liabilities fixed assets
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Introduction to Business BBI2O-B Lesson 9, page 13 Copyright © 2008 The Ontario Educational Communications Authority. All rights reserved. The Balance Sheet As stated earlier in the lesson, the balance sheet is a financial statement that reveals the overall strength of a business. It provides a financial picture of the firm on one specific day . What the balance sheet shows on that day will be slightly different from the next day or the previous day, because the business changes every day with every new transaction. The balance sheet does not show whether a business has made a profit, only how financially strong it is in terms of what it owns (assets and owner’s equity) compared to what it owes (liabilities). Look at the balance sheet of a dog-grooming company called Little Friends Grooming.
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Lesson 9, page 14 Introduction to Business BBI2O-B Copyright © 2008 The Ontario Educational Communications Authority. All rights reserved. Little Friends Grooming Balance Sheet January 31, 2008 Assets Totals Current Assets Cash $ 5 300 Accounts Receivable: F. Ranz ($ 85) S. Hubert ($125) 210 Product Inventory 2 400 Supplies Inventory 500 Total Current Assets $ 8 410 Fixed Assets Equipment 4 000 Van 14 400 Total Fixed Assets $18 400 Total Assets $26 810 Liabilities Current Liabilities Accounts Payable: Pet Supply Warehouse ($200) Creative Kennel ($700) Total Current Liabilities $ 900 Long-Term Liabilities Bank Loan $ 4 600
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