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