ACCOUNTING EQUATION AND FINANCIAL STATEMENTS

• FINANCIAL STATEMENT - serve as business's report cards; They provide a graphical representation of the company's financial condition over a specific time frame (quarterly, semi-annually, or annually).
• FOUR FINANCIAL STATEMENTS - INCOME STATEMENT, STATEMENTS OF OWNER'S EQUITY, BALANCE SHEET, STATEMENT OF CASH FLOW
• INCOME STATEMENT - frequently an analyst or investor's first stop. The company's performance is shown on the this statement for each period, with sales revenue at the top. The statement then calculates gross profit by subtracting the cost of goods sold (COGS). Depending on the nature of the business, other operating expenses and income affect gross profit from there to net income at the bottom.
• STATEMENT OF OWNER'S EQUITY - All equity accounts, including common stock, net income, paid-in capital, and dividends that affect the final equity balance, are shown on the statement of stockholder's equity. It is prepared after the income statement since the period's net income or net loss must be reported here. Similarly, it is prepared before the balance sheet because the amount of owner’s equity at the end of the period must be reported there.
• BALANCE SHEET - shows the organization's assets, liabilities, and owner’s equity at a particular moment. Balance must be maintained on both sides of the balance sheet: Liabilities and equity must equal assets.
• STATEMENT OF CASH FLOW - statement then subtracts any non-cash expenses from the net income. Then, changes to the balance sheet are used to calculate cash inflows and outflows; shows the beginning and ending cash balances and the change in cash per period.
• DOUBLE-ENTRY ACCOUNTING - is a system that ensures that accounting and transaction equations should be equal as it affects both sides. Any change in the asset account, there should be a change in related liability and owner’s equity account. While performing journal entries, the accounting equation should be kept in mind
• DEBIT - an entry on the left side of an account ledger
• CREDIT - an entry on the right side
• ELEMENTS OF FINANCIAL STATEMENTS - ASSET, LIABILITIES, EQUITY, REVENUE, EXPENSES
• ASSETS - These are things of monetary advantage that are supposed to yield benefits in later periods; are tangible, like cash, while others are theoretical or intangible, like goodwill or copyrights
• RECEIVABLE - This is a promise to be paid by another party; arise when a company provides a service or sells a product to someone on credit
• CURRENT ASSETS - These assets can be exchanged for cash within a single operating cycle or fiscal year. It is also used to facilitate day-to-day operational expenses and investments. Therefore, short term assets are liquid, allowing for easy cash conversion.
• FIXED ASSETS - These assets are non-current resources that a company uses in its production of goods and services that have a life of more than one year; are recorded on the balance sheet as property, plant, and equipment
• LIABILITIES - . Law requires these obligations to be paid to another organization or individual; are creditors’ claims on a company asset because this is the amount of assets creditors would own if the company liquidated
• CURRENT LIABILITIES - These are debts that you have to pay back within the next twelve (12) months.
• NON-CURRENT LIABILITIES - These debts are not due for more than twelve (12) months.
• EQUITY - It is the sum invested in a company by its owners in addition to retained earnings. Owners can either increase their shares by contributing money to the company or decrease their equity by withdrawing company funds
• REVENUE - It is a measurement of a company's total gross activity. Service and product sales are two examples
• OPERATING REVENUE - is income you get from your business' primary exercises, similar to deals. Your services are the source of your company's revenue; fluctuates more frequently than non-operating revenue
• NON-OPERATING REVENUE- Is money earned from a side business that has nothing to do with your company's day-to-day operations, such as dividend income or investment profits. You often sell things but might not always make money from side jobs
• EXPENSES - It is when an asset loses value because it is used to make money.
• CASH ACCOUNTING - the expense is only recorded when the actual money has been paid. For instance, if a utility expense is incurred in April but paid for in May, it will be recorded as an expense in April using the accrual method. Still, it will be recorded as an expense in May using the cash method since cash is paid for it in May.
• ACCRUAL ACCOUNTING - is based on the matching principle, ensuring that accurate profits are reflected for every accounting period. The revenue for each period is matched to the expenses incurred in earning that revenue during the same accounting period.
• OPERATING EXPENSE - These are expenses related to the company’s main activities. This means the business will incur these expenses from normal, day-to-day activities.
• DISCRETIONARY EXPENSES - These expenses are considered non-essential spending. This means a business can still maintain its operation even if all of this expenses stop.