From What = Who to Preparing a Balance Sheet

Here is a written summation of how we went from the initial lecture to now preparing a balance
sheet!
Vincent Turner 2013
The world is filled with stuff. There are buildings, cars, bank accounts, crops, furniture and
machines. There are also things that we cannot see but we know exist. atents, cop!rights, leases
and accounts recei"able.
#ccountants want a more formal name for stuff. The! call it #ssets.
Assets = Who
eople and organi$ations ha"e claim to that stuff.
Assets = Who Has Claim.
%hen looking at our business we can see the assets. &n the flip side, we can see who has claim to
those assets.
There are two t!pes of claims' other people(s claims and m! claims.
Assets = Other People's Claims + M Claims
)laims are also referred to as e*uities.
Assets = Other People's !"#ities + M !"#it.
#ccountants ha"e a fanc! word for other people(s e*uities. These are known as liabilities.
Assets = $ia%ilities + M !"#it
+ecause , am the owner, we will call -! .*uit! &wner(s .*uit!.
Assets = $ia%ilities + O&ner's !"#it
This is the formal e*uation of accounting. The structure of accounting is based on this one
perspecti"e. #ccounting students memori$e it. #nd tr! to decipher it. /ou are wa! ahead of the
game because !ou understand that %hat 0 %ho1
2et(s +u! # )ar
The formula %hat 0 %ho is more than a formula. ,t is an e*ui"alenc!. ,t is reall! looking at the same
thing from two different perspecti"es.
,t is similar to looking at !our hand from top or bottom.
2ooking from the top !ou see fi"e fingernails. 2ooking from the other side, !ou see fi"e fingerprints.
,f !ou see six fingerprints and fi"e fingernails, !ou would be shocked1 #nd then !ou would ha"e
reali$ed that !ou miscounted.
#ccounting keeps track of fingernails and fingerprints. +ut the manner it keeps track with are in
dollars.
,f we bu! a car for 314,000, we can look at that car from two different perspecti"es. &ne perspecti"e
will be from the %hat side. #nd the other will be from the %ho side.
The %hat side is the asset side. %e ha"e an asset, our car. ,t is a 314,000 asset.
5rom the other side we can see who has claim to it. %e bought it outright. %e ha"e claim to it. %e
ha"e 314,000 of owners e*uit!.
-! What side is 314,000. -! Who side is 314,000. , can list this as'
The! are e*ual. &r better !et we can sa! that the! are e*ui"alent.
,magine another scenario. %e purchase a car for 314,000. %e put 31,000 down and take out a loan
from the bank for 316,000. %e signed a note for 316,000 agreeing to pa! back the loan.
7ere is our asset'
5rom the %ho perspecti"e, we show who has claim to the asset
The bank(s e*uit! is a liabilit!, someone else(s claim.
,f we were to list our assets, liabilities and owners e*uit! it would be
/ou see that this listing balances. &ur assets e*ual our liabilities and owner(s e*uit!.
%e ha"e co"ered two important accounting principles.
&ur acti"it! is shown in dollars.
#nd we balance.
,f we did not balance, it would ha"e been because of a calculation error. h!sicall! we must
balance. %e are looking at the same thing from two different "iewpoints.
%e ha"e also seen one of the ma8or financial statements that accountants produce. ,t is the +alance
9heet. ,t is called the +alance 9heet because it balances. ,t(s formal name is the 9tatement of
5inancial osition.
&ur +alance 9heet 8ust needs a few added touches to make it complete.
,t needs a heading. The heading begins with the entit!:s name. ,n this case it will be Vince:s )o.
%e also write out the name of the statement' +alance 9heet.
%e end with the date that this information represents. 5or us this will be 1;31;2014. That is the
date that our accounts represent.
The date is important. ,t is like weighing !ourself. /ou not onl! want to know how man! pounds !ou
weigh. +ut what date !ou were weighed. ,t is an instant in time. 2et:s show our balance sheet in
good form'
%e could also show this information side b! side.
/ou can almost see the %hat 0 %ho1 &n the %hat side we see things <%hats=. &n the %ho side
we see eople. %e:ll use a big >T? account. The %hat side will be on the left and the %ho side will
be on the right.