Audit report
1
Chapter 4:
Assets, Liabilities,
and Net Worth
Recording Financial Operations (1 of 2)
• Assets, liabilities, and net worth
– Are part of the language of finance
Recording Financial Operations (2 of 2)
• Because assets, liabilities, and net worth are part of the language of finance, it is important to understand both their composition and how they fit together.
2
Assets
• Economic resources that have expected future benefits to the business
Exhibit 4–1 Asset Examples
• Cash
• Accounts receivable
• Notes receivable
• Inventory
• Land
• Buildings
• Equipment
Liabilities
• “Outsider claims”
• Economic obligations
• Debts
• Payable to outsiders
3
Exhibit 4-2 Liability Examples
• Accounts payable
• Payroll taxes due
• Notes payable
• Mortgage payable
• Bonds payable
Net Worth
• “Insider claims”
– claims held by the owners of the business, aka owner’s equity, or net worth
Exhibit 4-3 Net Worth Terminology Examples
• For-profit sole proprietors or partnerships:
– Owners’ Equity
• For-profit corporations:
– Capital Stock
– Retained Earnings
• Not-for-profit (nonprofit) companies:
– Fund Balance
4
How Assets, Liabilities, and Net Worth Fit Together
• The Three-Part Equation
• An accounting equation reflects a relationship among assets, liabilities and net worth
• Assets = Liabilities + Net Worth
Assets
• Assets can be either short- or long-term.
(Review asset examples in Exhibit 4-1.)
Liabilities
• Liabilities can also be either short- or long-term.
(Review liability examples in Exhibit 4-2.)
5
Net Worth Terminology
• Net worth terminology depends on the type of organization, and may include:
– “Owners’ Equity”
– “Capital Stock” and “Retained Earnings”
– “Fund Balance”
(Review Exhibit 4-3 and match the net worth terms above to the three types of organizations.)
Organization Types Affect How Net Worth Is Expressed
• What for-profit companies can you name?
• What not-for-profit companies can you name?
• “And their net worth would be called . . .”
Balance Sheet Classification: Practice Exercise 4-I Solution
Short-Term
Asset
Long-Term
Asset
Short-Term
Liability
Long-Term
Liability
Payroll taxes due X
Accounts receivable X
Land X
Mortgage payable
(non-current)
X
Buildings X
Note payable
(due in 24 months)
X
Inventory X
Accounts payable X
Cash on hand X