Chapter 2 Summary
2.1
An important use of accounting data is to show the financial position of a business or person. Three steps to determine your financial position is as follows:
Step 1: List and total the things that you own that have dollar values (Assets).
Step 2: List and total your debts. (Liabilities).
Step 3: Calculate the difference between the total assets and total liabilities (Owner’s Equity).
2.2
We know what a financial position is but how do you present it?
You present a financial position by means called a balance sheet.
Definition:
Balance Sheet- A statement showing the financial position of a person, business, or other organization.
An example of a balance sheet:
Chris Turner
Balance Sheet
July 15, 20--
Assets || Liabilities ||
Cash ||$ 5500 Owned to Philip ||$ 8000
Bank Balance || 21550 Owed to Dad || 20000
Bicycle || 18 500
|| Overdue fines || 1250
|| _______
Stereo || 25000 Total Liabilites ||$ 29250
Ski Equipment || 30 000 ||
|| Owners Equity ||
|| Chris Turner, Capital || 71300
Total Assets || 100550
|| ════ Total Liabilities and Equity||$ 100550
|| ════
|| ||
Important Features on the Balance sheet:
-Set up as a fundamental accounting equation (A = L + OE).
-Three line heading used:
WHO?—The name of the individual, business, or other organization
WHAT? — The name of the financial statement
WHEN? — The date on which the financial position is determined
-Assets are usually listed in the order of Liquidity
Definition:
Liquidity: It means the order in which the assets are converted into cash.
-Liabilities are listed in order which they are normally paid
-The two final totals, one on each side of the balance sheet, are recorded on the same line and underlined with a double line.
Accounts receivable and Accounts payable
Accounts Receivable- When customers of a business often buy goods or services from a business with a understanding that they will pay them later. These debts are known as Accounts Receivable.
Accounts Payable- A business that purchases goods and services from a supplier with the understanding that they will pay them later, it is known as Accounts Payable.