health care finance

Part II: Record Financial Operations

CHAPTER 3: ASSETS, LIABILITIES

AND NET WORTH

Recording Financial Operations

• Assets, liabilities and net worth

• Are part of the language of finance

Recording Financial Operations

• 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

Assets

• Economic resources that have expected future benefits to the business.

Exhibit 3–1 Asset Examples

• Cash

• Accounts receivable

• Notes receivable

• Inventory

• Land

• Buildings

• Equipment

Liabilities

• “Outsider claims”

• Economic obligations

• Debts

• Payable to outsiders

Exhibit 3-2: 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 3-3 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

How Assets, Liabilities & 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 3-1.

Liabilities

• Liabilities can also be either short- or long- term.

• Review liability examples in Exhibit 3-2.

Net Worth Terminology

• Net worth terminology depends on the type of organization, and may include:

• “Owners’ Equity”

• “Capital Stock” & “Retained Earnings”

• “Fund Balance”

• Review Exhibit 3-3 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 3-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