Bus 1050 1st Edition Lecture 18 Outline of Last Lecture I Littleton The Evolution of Accounting II Pacioli Particulars of Reckonings and Their Recordings from Ancient Double Entry Bookkeeping Lucas Pacioli s Treatise A Memorandum B Journal C Ledger Outline of Current Lecture II The Contemporary Double Entry System slide in Canvas A Assets B Equity C Liability III Introduction to Finance Current Lecture Equity is residual value In other words it is not something you may hold It s not something that may be picked up and carried around because it s merely a representation of a value Double entry bookkeeping has no negative numbers in it For double entry bookkeeping to work debits must equal credits Debits must always be on the left hand side and credits must always be on the right In other words assets are on the left and equity coupled with liabilities are on the right In the slideshow presentation the person who puts down 50 k is the owner or the equity investor It s important to keep in mind that one s contribution does not need to be in cash For example one could put down equipment In order to increase the asset values one must debt cash In this example we have the following Assets of cash 50k liability 0 owners contribution 50k A lean on something is a burden on it If someone puts a lean on something then one can t do something to it until permission has been given to do so These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute If 50k are borrowed the cash goes up by 50k In this case one would debit the cash in order to increase the account balance Due to this borrowing of money the liabilities are now 50k and equity is 50k Assets 100k Money borrowed from bank 50k payable to the bank contribution of owner 50k If one purchases land for 70k then one has gained land as an asset and has given up 70k To get the balance in the account to increase one must debit cash When we want to decrease the value of the account we would credit cash The Historical cost of something is how much one pays for it Cash 30k Land 70K 50k 50k Now with someone buying half of the land for 60k the equation would look like the following Cash 60k Land 70k Accounts receivable owed to you 30k 50k 60k Assets liability equity The net worth of something is not determined by the amount one borrows Equity represents net worth which is the value to the owner If one makes a profit off of the land then the equity goes up But if one losses money off of the land then the equity goes down The only things that change the net worth of a company are contribution or withdrawals by owners or profits and losses In other words in order to increase the net worth of a company there must be a contribution made by the owner or a profit must have been made Similarly in order to decrease the net worth of a company there must be a withdrawal from an owner or a loss must take place 50k from owner 50k borrowed from bank 70k purchase of land 30k now from selling land and 30k future as account receivable Half of the land was purchased for a total of 60k Introduction to Finance Financial forecasting is the process of looking at companies financial situations in regards to inflows and outflows looking at whether or not there is adequate money to fund projects internally and if there s not then figuring out where one would get it Capital Structure is the relationship between how much debt you have and how much equity you have relative to one another and relative to assets This is represented by the equation A L E We want to invest in productive assets which will raise debt capital by selling bonds and equity capital Lending is less risky than being an owner Individual equity investors or the public capital Financial analysis ratio analysis measures of liquidity leverage which is how much debt you have relative to etc Cost of financing