Financial Accounting: Assets, Liabilities, and Balance Sheets

Assets

What the company owns (e.g., cash in bank, inventory, equipment, accounts receivable).

Liabilities

What the company owes (e.g., loans, debts, accounts payable).

Owner's Equity

The owner's share in the company (e.g., capital invested, profit).

Balance Sheet

An accounting report that details a firm's financial position at a particular point in time by reporting its assets, liabilities and owner's equity.

Accounting Equation

Assets = Owner's Equity + Liabilities.

Current Assets

Economic resources that are expected to produce a future economic benefit (e.g., cash) within 12 months.

Non-Current Assets

Long-term assets that are not expected to produce an economic benefit within 12 months.

Current Liabilities

Debts or obligations that are expected to be paid within 12 months.

Non-Current Liabilities

Long-term obligations that are due after more than 12 months.

Asset Example

Vehicles, Accounts receivable, Intellectual property (IP), Inventory, Cash in bank.

Liability Example

Accounts Payable, Loans, Bank overdrafts.

Loan Classification

Loans can be split between current and non-current liabilities based on their due dates.

Owner's Equity Definition

What is 'left of' the assets for the owner, after paying all of their liabilities.

Residual Interest

The residual interest in the assets of the entity after deducting all of its liabilities.

Classified Balance Sheet Purpose

Provides more information regarding the financial strengths and weaknesses of a firm.

Liquidity

How easily a company can convert assets to cash to meet short-term obligations.

Quiz Question 1

If a business has assets worth $80,000 and liabilities worth $35,000, what is its owner's equity? $45,000.

Quiz Question 2

Which of the following is NOT a correct rearrangement of the accounting equation? Assets = Owner's Equity - Liabilities.

Quiz Question 3

XYZ Ltd has total assets worth $100,000, which includes cash of $20,000, inventory of $30,000, accounts receivable of $15,000, and property valued at $35,000. The company also has liabilities of $40,000. What is the value of XYZ' Ltd's non-current assets? $35,000.

What is the primary role of accounting?

To provide financial information and advice needed for informed decision-making.

Who are the accounts receivable users and what do they care about?

Accounts Receivable and Customers are interested in the firm's ability to continue providing products.

What concerns do accounts payable users have?

Accounts Payable and Suppliers are concerned with the firm's ability to repay its debts.

What do banks assess regarding a firm?

Banks want to evaluate the firm's debt levels and repayment ability before extending finance.

What are employees interested in regarding a firm?

Employees are interested in the firm's long-term viability, job security, and potential wage improvements.

What does the Australian Taxation Office (ATO) require?

The ATO requires financial data for taxation purposes.

What are the four stages of the accounting process?

1. Collecting source documents, 2. Recording, 3. Reporting, 4. Advice.

What is the purpose of source documents in accounting?

Source documents provide evidence of transactions and details necessary for recording.

How do the recording and reporting stages differ in the accounting process?

Recording involves sorting and summarizing information, while reporting presents that information in an understandable format.

What does a balance sheet report?

A balance sheet details a firm's financial position by reporting its assets, liabilities, and owner's equity at a specific point in time.

What is the accounting equation?

The accounting equation is Assets = Liabilities + Owner's Equity.

What is the two-fold effect in accounting?

Every transaction impacts the accounting equation in at least two ways.

What is classified as a current asset?

Examples include cash on hand, inventory, and accounts receivable.

What is classified as a non-current asset?

Examples include equipment, premises, and vehicles.

What is classified as a current liability?

Examples include accounts payable and bank overdrafts.

What is classified as a non-current liability?

Examples include mortgages and long-term loans.

What is the purpose of preparing a balance sheet?

To provide a snapshot of a firm's financial position at a specific date.

What is the significance of owner's equity in a balance sheet?

Owner's equity represents the residual interest in the assets of the firm after deducting liabilities.

How do you calculate owner's equity?

Owner's equity is calculated by subtracting total liabilities from total assets.

What is the role of an accountant in the advice stage of the accounting process?

An accountant provides suggestions based on financial reports to help owners make informed decisions.

Why is non-financial information important for decision making?

Non-financial information provides context and insights that financial data alone may not reveal.

What is the difference between internal and external users of accounting information?

Internal users are within the organization (e.g., management), while external users are outside (e.g., investors, creditors).

What is the importance of classifying assets and liabilities?

Classification helps in understanding the liquidity and financial health of the business.

What are examples of non-financial information?

Examples include customer satisfaction, employee turnover, and market trends.