Module 2

• Businesses' financial statements serve as their "report cards." They provide a graphical representation of the company's financial condition over a specific time frame
• The Four Financial Statements

  • Income Statement
  • Statement of Owner’s Equity (Retained Earnings Statement)
  • Balance Sheet (Statement of Financial Position)
  • Statement of Cash Flow
• The Accounting Equation

  Assets = Liabilities + Owner’s equity
• Double-entry accounting is a system that ensures that accounting and transaction equations should be equal as it affects both sides
• 5 Elements of Financial Statements

  • Assets
  • Liabilities
  • Equity
  • Revenue
  • Expenses
• Assets. These are things of monetary advantage that are supposed to yield benefits in later periods.
• Two (2) Categories of Assets

  • 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.
  • Fixed (Non-current) 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
• Liabilities are creditors’ claims on a company asset because this is the amount of assets creditors would own if the company liquidated
• Two (2) Categories of Liabilities

  • Current Liabilities. These are debts that you have to pay back within the next twelve (12) months
  • Non-current (Long term) 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.
• Revenue. It is a measurement of a company's total gross activity.
• Two (2) Categories of Revenue

  • Operating Revenue is 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, such as dividend income or investment profits.
• Expenses. It is when an asset loses value because it is used to make money.
• Under 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.
• Two (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. This means a business can still maintain its operation even if all discretionary expenses stop.