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. Patents, copyrights, leases and accounts receivable.

Accountants want a more formal name for stuff. They call it Assets.

Assets = Who

People and organizations have claim to that stuff.

Assets = Who Has Claim.

When looking at our business we can see the assets. On the flip side, we can see who has claim to those assets.

There are two types of claims: other people's claims and my claims.

Assets = Other People's Claims + My Claims

Claims are also referred to as equities.

Assets = Other People's Equities + My Equity.

Accountants have a fancy word for other people's equities. These are known as liabilities.

Assets = Liabilities + My Equity

Because I am the owner, we will call My Equity Owner's Equity.

Assets = Liabilities + Owner's Equity

This is the formal equation of accounting. The structure of accounting is based on this one

perspective. Accounting students memorize it. And try to decipher it. You are way ahead of the game because you understand that What = Who!

Let's Buy A Car

The formula What = Who is more than a formula. It is an equivalency. It is really looking at the same thing from two different perspectives.

It is similar to looking at your hand from top or bottom.

Looking from the top you see five fingernails. Looking from the other side, you see five fingerprints.

If you see six fingerprints and five fingernails, you would be shocked! And then you would have realized that you miscounted.

Accounting keeps track of fingernails and fingerprints. But the manner it keeps track with are in dollars.

If we buy a car for $15,000, we can look at that car from two different perspectives. One perspective will be from the What side. And the other will be from the Who side.

The What side is the asset side. We have an asset, our car. It is a $15,000 asset.

From the other side we can see who has claim to it. We bought it outright. We have claim to it. We have $15,000 of owners equity.

My What side is $15,000. My Who side is $15,000. I can list this as:

They are equal. Or better yet we can say that they are equivalent.

Imagine another scenario. We purchase a car for $15,000. We put $1,000 down and take out a loan from the bank for $14,000. We signed a note for $14,000 agreeing to pay back the loan.

Here is our asset:

From the Who perspective, we show who has claim to the asset

The bank's equity is a liability, someone else's claim.

If we were to list our assets, liabilities and owners equity it would be

You see that this listing balances. Our assets equal our liabilities and owner's equity.

We have covered two important accounting principles.

Our activity is shown in dollars.

And we balance.

If we did not balance, it would have been because of a calculation error. Physically we must balance. We are looking at the same thing from two different viewpoints.

We have also seen one of the major financial statements that accountants produce. It is the Balance Sheet. It is called the Balance Sheet because it balances. It's formal name is the Statement of Financial Position.

Our Balance Sheet just needs a few added touches to make it complete.

It needs a heading. The heading begins with the entity’s name. In this case it will be Vince’s Co.

We also write out the name of the statement: Balance Sheet.

We end with the date that this information represents. For us this will be 1/31/2015. That is the date that our accounts represent.

The date is important. It is like weighing yourself. You not only want to know how many pounds you weigh. But what date you were weighed. It is an instant in time. Let’s show our balance sheet in

good form:

We could also show this information side by side.

You can almost see the What = Who! On the What side we see things (Whats). On the Who side we see People. We’ll use a big “T” account. The What side will be on the left and the Who side will be on the right.