The balance sheet is also called the statement of financial position.

The balance sheet reports a company’s financial position as at a specific date (e.g., last day of a monthly, quarterly, or annual reporting period).  Since it is presented as at a specific date, you can think of the balance as a snapshot of the company’s financial position at a particular point in time.

Note: the other 3 statements cover a period of time.

From the balance sheet above, note the Accounting Equation (Assets = Liabilities + Shareholders’ Equity):
Total Assets = $90,973 which equals the Total Liabilities and Shareholders’ Equity = $90,973.

Balance Sheet Has Three Main Elements:

1. Assets: Economic resources controlled by the entity as a result of past business events from which future economic benefits may be obtained.
   1. Current assets: Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’ operating cycle, whichever is longer, and include:
      1. Cash and cash equivalents
      2. Short-term investments
      3. Accounts and notes receivable
      4. Inventory
      5. Prepaid expenses
   2. Non-current assets: Will be held longer than one year and include:
      1. Property and equipment
      2. Land
      3. Buildings
      4. Computers
      5. Equipment
      6. Intangibles
      7. Long-term investments
2. Liabilities: Debts the entity owes as a result of a past event, and which it expects to pay off in the future using some of its assets.
   1. Current liabilities: Debts payable in the next 12 months or within the business’ operating cycle, whichever is longer, and include:
      1. Accounts payable
      2. Income taxes payable
      3. Accrued expenses payable
      4. Current maturities of long-term debt
   2. Non-current liabilities: Debts payable more than one year from the balance sheet date and include:
      1. Long-term notes payable
      2. Bonds payable
3. Shareholders’ equity: Owners’ remaining interest in the assets of the company after deducting all its liabilities (i.e., owners’ claim on the company’s assets net of company’s liabilities, hence, called net assets), consisting of two components:
   1. Share capital: capital (usually in the form of cash) received from its owners in exchange for shares of the company. Also called common shares.
   2. Retained earnings: the cumulative net income earned by the company over its lifetime, less its cumulative net losses and dividends. 
      Note: a portion of net income is typically distributed to shareholders in the form of dividends and the remainder is retained by the business that is called retained earnings.

The balance sheet takes its name from the fact that the assets (A) must always equal (be in balance with) the sum of the liabilities (L) and the shareholders' equity (SE).

A = L + SE

(Assets) = (Liabilities) + (Shareholders' Equity)

Assets refer to the economic resources of the company.

Companies can finance the economic resources in two ways:

1. Liabilities: Financing provided by creditors
2. Shareholders' equity: Financing provided by shareholders

Typical Account Titles

The balance sheet is also called the statement of financial position.

The balance sheet reports a company’s financial position as at a specific date (e.g., last day of a monthly, quarterly, or annual reporting period).  Since it is presented as at a specific date, you can think of the balance as a snapshot of the company’s financial position at a particular point in time.

Note: the other 3 statements cover a period of time.

From the balance sheet above, note the Accounting Equation (Assets = Liabilities + Shareholders’ Equity):
Total Assets = $90,973 which equals the Total Liabilities and Shareholders’ Equity = $90,973.

Balance Sheet Has Three Main Elements:

1. Assets: Economic resources controlled by the entity as a result of past business events from which future economic benefits may be obtained.
   1. Current assets: Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’ operating cycle, whichever is longer, and include:
      1. Cash and cash equivalents
      2. Short-term investments
      3. Accounts and notes receivable
      4. Inventory
      5. Prepaid expenses
   2. Non-current assets: Will be held longer than one year and include:
      1. Property and equipment
      2. Land
      3. Buildings
      4. Computers
      5. Equipment
      6. Intangibles
      7. Long-term investments
2. Liabilities: Debts the entity owes as a result of a past event, and which it expects to pay off in the future using some of its assets.
   1. Current liabilities: Debts payable in the next 12 months or within the business’ operating cycle, whichever is longer, and include:
      1. Accounts payable
      2. Income taxes payable
      3. Accrued expenses payable
      4. Current maturities of long-term debt
   2. Non-current liabilities: Debts payable more than one year from the balance sheet date and include:
      1. Long-term notes payable
      2. Bonds payable
3. Shareholders’ equity: Owners’ remaining interest in the assets of the company after deducting all its liabilities (i.e., owners’ claim on the company’s assets net of company’s liabilities, hence, called net assets), consisting of two components:
   1. Share capital: capital (usually in the form of cash) received from its owners in exchange for shares of the company. Also called common shares.
   2. Retained earnings: the cumulative net income earned by the company over its lifetime, less its cumulative net losses and dividends. 
      Note: a portion of net income is typically distributed to shareholders in the form of dividends and the remainder is retained by the business that is called retained earnings.

The balance sheet takes its name from the fact that the assets (A) must always equal (be in balance with) the sum of the liabilities (L) and the shareholders' equity (SE).

A = L + SE

(Assets) = (Liabilities) + (Shareholders' Equity)

Assets refer to the economic resources of the company.

Companies can finance the economic resources in two ways:

1. Liabilities: Financing provided by creditors
2. Shareholders' equity: Financing provided by shareholders

Typical Account Titles

The income statement is also called the statement of profit and loss.

• It measures a company’s operating performance for a specific period of time such as a month, a quarter, or a year.

• On the income statement, we subtract expenses from revenues to arrive at net earnings (net income or profit).

• Common year-ends by industries:

  • Most companies: Dec 31
  • Canada’s big banks: Oct 31
  • Many retailers: Jan 31

Revenues and Expenses

Let’s first examine the income statement heading, and then the income statement elements. Below is an Excel spreadsheet that requires you to sign in to Office 365. Office 365 will be used throughout this course to display tables and complete concept checks. 

If you cannot see the Excel spreadsheet below, please follow the instructions for Viewing embedded content in Chrome.

Income statements provide financial information for a period in time. For example, as shown above, it is “for the year ended December 31, 20XX.” In comparison, the balance sheet reflects the information for a point in time, “As at December 31, 20XX.”

The income statement has two main elements:

1. Total revenue consists of:

   1. Revenue: earned by a company in the course of its ordinary, day-to-day business activities such as the sale of a company’s primary goods and services.
   2. Gains: earned from peripheral business activities.

2. Total expenses consists of:

   1. Expenses: incurred in the course of ordinary business activities.
   2. Losses: incurred in the course of peripheral activities.

Revenues minus expenses are reported as net income

• If revenues > expenses  → net income, also known as net profit.

• If revenues < expenses →  net loss.

Case Examples of Total Revenue and Total Expenses

Apple Inc.’s ordinary revenues come from retail sales of products and services; peripheral revenues may include sales from land owned by Apple Inc.

Apple Inc.’s ordinary expenses include the cost of manufacturing the iPhone, laptops, iWatch, and other Apple products.

Typical Account Titles

What Are Retained Earnings?

• Put simply, retained earnings are the accumulated net income/losses since the company’s inception, less any dividends declared to shareholders. The statement of retained earnings reports the changes in retained earnings during the same period covered by the income statement. 

Positive Balance v. Negative Balance

• When historical income is greater than expenses and dividends, the result will be a positive balance in retained earnings.

• When historical expenses and dividends are greater than income, the result will be a negative balance in retained earnings called deficit.

Review the statement of retained earning and note the following elements:

1. Opens with beginning retained earnings balance (Dec 31, 2018 above)

2. Adds net income (or subtracts net loss)

   1. Flows from the income statement
3. Subtracts dividends

4. Reports ending retained earnings balance (Dec 31, 2019 above)

The four main financial statements were briefly introduced in the first topic. The basis on which these financial statements are prepared is known as the Generally Accepted Accounting Principles (GAAP). These standards, which specify that financial information must be recorded, measured, and reported, are universally used by accountants to prepare financial statements consistently.

There are multiple sets of GAAP and each is applicable based on the type of entity or organization.

In Canada, GAAP are established by the Chartered Professional Accountants (CPA) of Canada.

• Canadian public enterprises (stock-listed corporations) must use International Financial Reporting Standards (IFRS).
• IFRS are set by the International Accounting Standards Board (IASB).
• For example: Canadian Tire is listed on the TSX (CTC.A) and must use IFRS to report its financial statements.

However, Canadian private enterprises (not issued stock or debt on public markets) can use either IFRS or Accounting Standards for Private Enterprises (ASPE). Most private companies use ASPE to prepare their financial statements. This is because IFRS is costly and complex, especially for larger companies with complex operations.

Other sets of GAAP are applicable to not-for-profit organizations, pension plans, and government entities. You will learn about these GAAP in advanced accounting courses.

(Adapted from Harrison et al., 2018, p. 7–8) 

The financial statements prepared using these standards help stakeholders assess the performance of the business for a given period. This table provides a great overview of the purpose served and questions answered by each of these financial statements:

(Harrison et al., 2018, p. 7)

Let’s take a look at each of these financial statements in greater detail.

Accounting is an information system that measures and records business activities. The role of accounting is to identify, record, and measure the transactions or activities in a business to be able to evaluate its performance and assess its financial health

- (Harrison et al., 2018, p. 3)

This information is communicated to stakeholders using financial statements that contain useful information to help them make rational economic decisions. Financial statements are prepared based on a set of accounting rules, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS); these help standardize accounting across businesses. Review the flow of accounting information diagram below.  

This diagram illustrates the flow of accounting information and helps illustrate accounting’s role in business. The accounting process begins and ends with people making decisions.

Let’s apply the flow of accounting information to a real business: Apple Inc.

In this diagram, it begins with production. Apple Inc. produces a new annual line up of its iPhone. Then, it moves to purchasing. Customers make purchases at the store. From there is reporting. Revenues from the product and expenses from operating the store are reported in Apple’s quarterly and annual reports. These financial results inform managers’ decisions regarding product line, stocking, etc. This brings us back to production.

The flow of accounting results in transactions that are recorded and presented using four important financial statements to report the results to various stakeholders. We will explore these four financial statements further in the next topic.

These financial statements are used by different stakeholders. So, who are the users of financial information?

Managers: set goals, evaluate those goals, and take corrective action.

• Most companies hire managers to oversee the day-to-day operations of the business (i.e., operating activities).

• Managers make many business decisions using accounting info:

  • Should they build a new product line?
  • Should they open a regional sales office?
  • Should they acquire a competitor?
  • Should they extend credit to their major customers?

Investors: decide whether to invest in a business or evaluate an investment.

• Investors are individuals/groups who provide capital to finance a business’s activities by purchasing ownership interest. They own shares of the business and are called shareholders.

• Investors look for two sources of possible gain:

  • Sell ownership interest in the future for more than they paid.
  • Receive a portion of the company’s earnings in cash (dividends).

• Investors (shareholders) use accounting information to find out how much income they can expect to earn on their investment and where to invest their money.

• You too are an investor if you buy stocks, debt, or real estate! Financial information can help you decide where to invest your money.

Creditors: evaluate a borrower’s ability to make required payments.

• Creditors provide capital to finance a business’s activities by lending money. Unlike investors, creditors do not own a share of the company.

• For example, a bank lends funds to a company in the form of a loan that must be repaid by the company in the future along with interest.

Government and regulatory bodies such as Canada Revenue Agency (CRA): ensure organizations pay the correct amount of taxes.

• Government and regulatory bodies use accounting information for taxation and regulation of the stock markets. 

• For example, the CRA uses financial information to compute the sales and business taxes owed by a business and the Ontario Securities Commission requires periodic financial information from companies that are stock listed on the Toronto Stock Exchange (TSX).

Individuals: make investment decisions and/or manage a bank account.

• Individuals like you and me use financial information to make daily purchasing decisions.

• Do you budget your annual, monthly, or weekly spending? Even high-level budgeting of your tuition, rent, food, and transportation is, in a way, using financial information to determine your financial needs.

Not-for-profit organizations: use accounting information in virtually the same way as for-profit organizations.

• Like for-profit companies, not-for-profit organizations use financial information to make decisions about their operations and investments, and to report financial information to their users.

• Users of financial information for a not-for-profit organization include board members, managers, and the CRA.

• The CRA has a designated non-taxable business status for approved not-for-profit organizations. These designated organizations need to comply with reporting requirements and do not have to pay regular business taxes like for-profit companies.

Since different users have different reporting needs and underlying reasons for financial information, there are two types of accounting information:

Financial Accounting

Financial accounting provides information for different internal and external users:

• Internal users

  • Managers

  • Investors

• External users

  • Creditors

  • Government

  • Public

Financial accounting is the focus of our course!

Management Accounting

Management accounting provides the following information for internal users only:

• Budgets

• Forecasts

• Projections

• Detailed product level/department level information

This is most likely your next accounting course!

There are three main forms of business organizations: proprietorship, partnership, and corporation.