Chapter 2: The Balance Sheet
Friday, September 2, 2022 7:15 PM
• Building a balance sheet from business activities
- Establishing a business involves requiring:
- Assets: probable future economic benefits owned by the business
as a result of past transactions
- Liabilities: probable debts or obligations of the entity that result
from past transactions, which will be fulfilled by providing assets or
services
- Stockholders' equity: the financing provided by the owners and the
operations of business
- Key activity for start-up is to obtain financing
- Equity
- Through owner's contributions and reinvestments of profit
- debt
- Though loans and other amounts that must be repaid
- A business is obligated to repay debt financing, but it is not
obligated to repay its equity financing
- Terms for repaying a loan form the bank were described on a legal
document called a promissory note
- After obtaining initial financing, a company will start investing in assets
that will be used after the business opens
- A company always documents its activities
- Promissory notes, electronic stock certificates, checks, etc.
- A company always receives something and gives something
- Create value through exchange
- Because the accounting system captures what is received and what
is given, it is often referred to as a "double-entry" system
- Each exchange is analyzed to determine a dollar amount that represents
the value of items given and received
- Cost principle: requires assets to be initially recorded at the
historical cash-equivalent cost, which is the amount paid or payable
on the date of transaction
- Transaction analysis: determining whether a transaction exists and
analyzing its impact on the accounting equation
- Two simple ideas are used when analyzing transactions:
- Duality of effects: every transaction has at least two effects
on the basic accounting equation
- A = L + SE
, historical cash-equivalent cost, which is the amount paid or payable
on the date of transaction
- Transaction analysis: determining whether a transaction exists and
analyzing its impact on the accounting equation
- Two simple ideas are used when analyzing transactions:
- Duality of effects: every transaction has at least two effects
on the basic accounting equation
- A = L + SE
• The transactions and other activities
- Transactions: an exchange or an event that has a direct economic effect
on the assets, liabilities, or stockholders' equity of a business
- External exchanges: these exchanges involving assets, liabilities,
and/or stockholders' equity between the company and someone
else
- Internal exchanges: these events do not involve exchanges with
others outside the business, but rather occur within the company
itself
- Some important activities that occur will not be captured by the
accounting system because they are not transactions
- An exchange of only promises is not an accounting
transaction
- Later, when the promises result in actually receiving or
giving an asset or service, they become transactions
• The accounting cycle
Friday, September 2, 2022 7:15 PM
• Building a balance sheet from business activities
- Establishing a business involves requiring:
- Assets: probable future economic benefits owned by the business
as a result of past transactions
- Liabilities: probable debts or obligations of the entity that result
from past transactions, which will be fulfilled by providing assets or
services
- Stockholders' equity: the financing provided by the owners and the
operations of business
- Key activity for start-up is to obtain financing
- Equity
- Through owner's contributions and reinvestments of profit
- debt
- Though loans and other amounts that must be repaid
- A business is obligated to repay debt financing, but it is not
obligated to repay its equity financing
- Terms for repaying a loan form the bank were described on a legal
document called a promissory note
- After obtaining initial financing, a company will start investing in assets
that will be used after the business opens
- A company always documents its activities
- Promissory notes, electronic stock certificates, checks, etc.
- A company always receives something and gives something
- Create value through exchange
- Because the accounting system captures what is received and what
is given, it is often referred to as a "double-entry" system
- Each exchange is analyzed to determine a dollar amount that represents
the value of items given and received
- Cost principle: requires assets to be initially recorded at the
historical cash-equivalent cost, which is the amount paid or payable
on the date of transaction
- Transaction analysis: determining whether a transaction exists and
analyzing its impact on the accounting equation
- Two simple ideas are used when analyzing transactions:
- Duality of effects: every transaction has at least two effects
on the basic accounting equation
- A = L + SE
, historical cash-equivalent cost, which is the amount paid or payable
on the date of transaction
- Transaction analysis: determining whether a transaction exists and
analyzing its impact on the accounting equation
- Two simple ideas are used when analyzing transactions:
- Duality of effects: every transaction has at least two effects
on the basic accounting equation
- A = L + SE
• The transactions and other activities
- Transactions: an exchange or an event that has a direct economic effect
on the assets, liabilities, or stockholders' equity of a business
- External exchanges: these exchanges involving assets, liabilities,
and/or stockholders' equity between the company and someone
else
- Internal exchanges: these events do not involve exchanges with
others outside the business, but rather occur within the company
itself
- Some important activities that occur will not be captured by the
accounting system because they are not transactions
- An exchange of only promises is not an accounting
transaction
- Later, when the promises result in actually receiving or
giving an asset or service, they become transactions
• The accounting cycle
