ACCOUNTING EQUATION AND FINANCIAL STATEMENTS

• Businesses' financial statements serve as their "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

  statement of owner's equity

  balance sheet

  statement of cash flow
• income statement if frequently an analyst or investor's first stop.
• cost of goods sold (COGS)
• statement of owner's equity (retained earnings statement)

  all equity accounts, including common stock, net income, paid-in capital, and dividends that affect the final equity balance.
• balance sheet (statement of financial position) shows the organization's assets, liabilities, and owner's equity at a particular moment.
• statement of cash flow statement then subtracts any non-cash expenses from the net income.
• Assets = Liabilities + Owner's Equity
• according to an article by Byjus, the accounting equation is the basic element of the balance sheet and the primary principle of accounting.
• Assets = Liabilities + Shareholder's Equity + Revenue - Expenses - Draws
• according to Gordon (2022), the owner's equity section of the basic equati0on has been divided into contributed capital, beginningretained earnings, revenue, expenses, and dividends.
• The double-entry system cannot function without debits and credits.

  In accounting, an entry on the left side of an account ledger is called a debit, and an entry on the right side is called a credit.
• the major accounts (elements of financial statements)

  assets - these are the things of monetary advantge that are supposed to yield benefits in later periods.

  
  

  liabilities - law requires these obligations to be paid to another organization. creditors claims on a company asset.

  
  

  equity - the sum invested in a company by its owners in addition to retained earnings.

  
  

  revenue - a measurement of a company's total gross activity.

  
  

  expenses - when an asset loses value because it is used to make money.
• 2 categories of Asset:

  current assets - can be exchanged for cash within a singleoperating cycle or fiscal year. used to facilitate day-to-day operational expenses and investments.

  fixed assets - non-current resources that a company uses in its production of goods and services that have a life of more than one year.
• 2 categories of Liabilities:

  current liabilities - these are the debts that you have to pay back within the next twelve months.

  non-current liabilities - these debts are not due for more than twelve months.
• 2 categories of Revenue:

  operating revenue - income you get from your business' primary exercises, similar to deals.

  non-operating revenue - is money earned from a side business that has nothing to do with your company's day-to-day operations.
• cash accounting - the expense is only recorded when the actual money has been paid.

  accrual accounting - is based on the matching principle, ensuring that accurate profits are reflected for every accounting period.
• 2 categories of Expenses:

  operating expense - these are expenses related to the company's main activities.

  discretionary expense - these expenses are considered non-essential spending.
• Sales journal


  Used to keep track of all a company's sales
• Cash receipt journal


  Journal that keeps track of all cash payments
• General journal


  Book of original entry, keeps track of all financial transactions by date
• General ledger


  Final book of entries, provides a reconciled balance by summarizing an account's journal entries
• Cash disbursement journal


  Accountants maintain the internal journal known as cash disbursement to record cash outflows in businesses
• Books of Accounts


  Recorded documents on the financial transactions
• Purchase journal


  One of the books of accounts that keep track of the company's credit-based purchases and expenditures