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MGTA02H3 Lecture Notes - Balance Sheet, Financial Statement, A Question Of Balance

Management (MGT)
Course Code
Chris Bovaird

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Chapter 4 - Understanding Accounting
Once a year, at least, at the end of their “fiscal” year accountants collect the
financial information, analyse it and present it into the two principle
“Financial Statements”:
1. The Balance Sheet
2. The Income Statement
The Balance Sheet
One way of judging the financial position, the wealth or the status of an
individual, or an organization, is to ask:
“How much stuff do they have?” or
“How big is their house?” or
“How many cars do they own?”
While the possession of material things isn’t necessarily a proof of a good
life, happiness, or current prosperity, the ability of any individual or
organization (particularly an economic entity like a business) to raise the
money needed to acquire material things and resources is in some sense a
proxy for a financial foundation.
The Balance Sheet is the financial statement that attempts to answer the
question: “What are the resources available to the business?” or put more
simply “What things does the business own?”
Balance Sheet – Purpose
A balance sheet shows the resources owned and available to the business
It shows the resources of the company - ASSETS.
It shows their value.
It shows how the ASSETS were acquired.
The money to acquire ASSETS can be borrowed / owed – LIABILITIES
Or the money to acquire assets can be money that
you had already possessed or previously earned - OWNER’S EQUITY
The Balance Sheet
The Balance Sheet is like a snap shot.
Shows information about a company at a moment in time.
Chris' Investments Inc.
Balance Sheet
on 31 December 1994
House $250,000 Mortgage $210,000
Inheritance 20,000
Life Savings 20,000
Total Assets $250,000 Liabs + Equity $250,000
Assets are the resources available to a business.
Assets include only things that can be SOLD or GIVEN AWAY.
(In accounting terms, people are not assets.)
Assets are generally good things to have.
They represent a potential, future source of cash.
Chris' Investments Inc.
Balance Sheet
on 1 January 1995
Car 20,000 Car Loan 20,000
House 250,000 Mortgage 210,000
Wife (not an asset) EQUITY
Inheritance 20,000
Life Savings 20,000
Total Assets $270,000 = Liabs + Equity $270,000