Presentation on theme: "Accounting and the Business Environment"— Presentation transcript:
1 Accounting and the Business Environment Chapter 1 describes the purpose of accounting in the business environment.Chapter 1
2 Learning Objectives Introduction review The accounting profession and the organizations that govern itTypes of business organizationsCharacteristics and organization of a corporationThe financial report that is at heart of the entire accounting universeThe objectives of this chapter include to:Define accounting vocabulary.Define the users of financial information.Describe the accounting profession and the organizations that govern it.Identify the different types of business organizations.Delineate the distinguishing characteristics and organization of a corporation.
3 Learning Objectives Accounting concepts and principles The balance sheet: the accounting equation, assets, liabilities, and equity.Use the accounting equation to analyze transactionsPrepare financial statementsUse financial statements to evaluate business performanceAdditional objectives include to:Apply accounting concepts and principles.Describe the accounting equation, and define assets, liabilities, and equity.Use the accounting equation to analyze transactions.Prepare financial statements.Use financial statements to evaluate business performance.
4 1Introduction reviewThe first learning objective is to define accounting vocabulary.
5 Accounting is “the language of business.” The information system that:Measures business activityProcesses the data into reportsCommunicates the results to decision makersPresents information in monetary termsKnowing how to speak this language makes you a better decision maker, no matter what career path you choose in business.Accounting is the information system that measures business activity, processes the data into monetary reports, and communicates the results to decision makers. In actuality, it is “the language of business.”Accounting is an information system that:measures business activity.processes the data into reports.communicates the results to decision makers.Presents the information in monetary terms.
6 The Income Statement Revenues Expenses Net Income (Net Loss) All numbers in thousandsRevenuesAmounts earned by delivering goods or services to customersExpensesDecreases in equity that occur from using assets or increasing liabilities in the course of delivering goods or services to customersNet Income (Net Loss)Wealth created (consumed) by revenue and expense transactions.
7 The accounting profession and the organizations that govern it 2The accounting profession and the organizations that govern itThe third learning objective is to describe the profession of accounting and the organizations that govern it.
8 The Accounting Profession Lucrative career with many opportunitiesCertified Public Accountants (CPAs)Meet education and/or experience requirementsPass qualifying examLicensed professional accountants who are approved to serve the general publicCertified Public Accountants, or CPAsCertified professionals in accounting for a single company.Certified Management Accountants, or CMAsAccounting is considered a profession, just like law and medicine. To become a certified public accountant (CPA), a person must pass a qualifying exam. In addition, each state has its own rules about education and experience requirements. Most accountants are paid quite well. For example, the average starting salary in 2007 for a college graduate with a bachelor's degree in accounting was almost $44,000. A graduate with a master's degree earns about 10% more to start and CPAs earn another 10%.Accountants either work in public accounting or private accounting. People who work in CPA firms are public accountants. Many accounting firms are organized as partnerships, and the partners are the owners. It usually takes 10 to 15 years to rise to the rank of partner. The partners of the large accounting firms earn from $150,000 to $500,000 per year. Accountants who work for a business or nonprofit are in private accounting. In private accounting, the top position is called the chief financial officer (CFO), and a CFO earns about as much as a partner in an accounting firm. Accountants get to the top of organizations as often as anyone else. Why? Because the accountants must deal with everything in the company in order to record all of its activities. Accountants often have the broadest view of what's going on in the company.
9 California Society of Certified Public Accountants CalCPA, Silicon Valley ChapterCareer building resourcesContinuing educationProfessional networking & involvementScholarships
10 Governing Organizations Financial Accounting Standards BoardA privately funded organization, formulates accounting standardsFASBSecurities and Exchange CommissionU.S. governmental agency that oversees U.S. financial markets.SECAmerican Institute of Certified Public AccountantsPrivate organization of public accountantsSource for ethical standards in many areasAICPAPublic Company Accounting Oversight BoardOversees auditing standards and practicesPCAOBInternational Accounting Standards BoardPublishes the International Financial Reporting Standards, the international accounting rule bookIASBThe SEC is the U.S. governmental agency that oversees U.S. financial markets. It also oversees those organizations that set standards (like the FASB).In the United States, the Financial Accounting Standards Board (FASB), a privately funded organization, formulates accounting standards. The FASB works with governmental regulatory agencies like the Securities and Exchange Commission (SEC).The FASB also works with congressionally created groups like the Public Companies Accounting Oversight Board (PCAOB) and private groups like the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA). The guidelines for public information are called generally accepted accounting principles (GAAP).PCAOB is the public company accounting oversight board. This board was established by the Sarbanes Oxley law in 2002, with the purpose of establishing auditing standards to try and dampen the rampant fraud that precipitated the law.
11 Audit: an opinioned examination Why Audit:Businesses want to look goodInvestors want reliable financial informationHelp uphold the faithful representation principleSEC requires companies to have financial statements examined by independent accountantsAuditors provide an opinion on financial statementsU.S. Government crackdown on fraud:Created the Public Company Accounting Oversight Board (PCAOB)Passed the Sarbanes-Oxley Act (SOX)A variety of Post-Madoff reformsAn audit is an examination. The independent accountants then issue an opinion that states whether or not the financial statements give a fair picture of the company’s financial situation.The vast majority of accountants do their jobs professionally and ethically, but we never hear about them. Unfortunately, only those who cheat make the headlines.In response to the Enron and WorldCom reporting scandals, the U.S. government took swift action. It passed the Sarbanes-Oxley Act, which made it a criminal offense to falsify financial statements.It also created a new watchdog agency, the PCAOB, to monitor the public’s faith in financial reporting as it currently exists.
12 Types of business organizations 3Types of business organizationsThe fourth learning objective is to identify the different types of business organizations.
13 Types of Business Organizations ProprietorshipPartnershipCorporationLLC and LLPNot-for-profitA proprietorship has a single owner, called the proprietor, who often manages the business. Proprietorships tend to be small retail stores or professional businesses, such as attorneys and accountants. From an accounting perspective, every sole proprietorship is distinct from its owner: The accounting records of the proprietorship do not include the proprietor’s personal records. However, from a legal perspective, the business is the proprietor. A proprietorship has one owner called a proprietor.A partnership joins two or more individuals as co-owners. Each owner is a partner and can commit the partnership in a binding contract. This is called mutual agency. Mutual agency means that one partner can make all partners mutually liable. Many retail stores and professional organizations of physicians, attorneys, and accountants are partnerships. Most partnerships are small or medium-sized, but some are gigantic, with thousands of partners. For accounting purposes, the partnership is a separate organization, distinct from the partners. A partnership has two or more owners called partners.A corporation is a business owned by stockholders, or shareholders. These are the people who own shares of stock in the business. Stock is a certificate representing ownership interest in a corporation. A business becomes a corporation when the state approves its articles of incorporation and the first stock share is issued. The articles of incorporation are the rules approved by the state that govern the management of the corporation. Unlike a proprietorship and a partnership, a corporation is a legal entity distinct from its owners. A corporation has one or more owners called shareholders.In a limited-liability partnership, each member/partner is liable (obligated) only for his or her own actions and those under his or her control. Similarly, a business can be organized as a limited-liability company. In an LLC, the business—and not the members of the LLC—is liable for the company’s debts. This arrangement prevents an unethical partner from creating a large liability for the other partners, much like the protection a corporation has. Today most proprietorships and partnerships are organized as LLCs and LLPs. An LLC has one or more owners called members.A not-for-profit is an organization that has been approved by the Internal Revenue Service to operate for a religious, charitable, or educational purpose. A board, usually composed of volunteers, makes the decisions for the not-for-profit organization. Board members have fiduciary responsibility, which is an ethical and legal obligation to perform their duties in a trustworthy manner. A not-for-profit has no owners.
14 Characteristics and organization of a corporation 4Characteristics and organization of a corporationThe fifth learning objective is to describe the characteristics and organization of a corporation.
15 Organization of a Corporation Incorporators obtain charter from the stateCharter authorizes corporation to:Issue stockConduct business in accordance with state lawIncorporators agreed to a set of bylawsBylaws are the rule book that guides the corporation.Corporations begins to exist when stock is issuedStockholders vote on who will serve on Board of DirectorsCreation of a corporation begins when its organizers, called the incorporators, obtain a charter from the state. The charter includes the authorization for the corporation to issue a certain number of shares of stock, which represent the ownership in the corporation. The incorporators pay fees, sign the charter, and file the required documents with the state. Once the first share of stock is issued, the corporation comes into existence. The incorporators agree to a set of bylaws, which act as the constitution for governing the corporation.
16 Structure of a Corporation The ultimate control of the corporation rests with the stockholders, who normally receive one vote for each share of stock they own. The stockholders elect the members of the board of directors, which sets policy for the corporation and appoints the officers. The board elects a chairperson, who usually is the most powerful person in the corporation. The board also designates the president who, as chief operating officer, manages day-to-day operations. Most corporations also have vice-presidents in charge of sales, operations, accounting and finance, and other key areas.
17 The good side of Incorporation Limited personal liability for stockholders.Fund-raising!Transferability of ownership.Continuity of existence.
18 The dark side of Incorporation Greater regulation.Double taxation.Separation of ownership and management.Cost of formation.
19 Quiz Corp: Name two benefits of incorporating. Name two negatives of incorporating.
20 Comparison of Business Forms ProprietorshipPartnersCorporationLLC, LLPNot-for-ProfitOwnersProprietor:One OwnerPartners: Two or moreStockholders: usually manyMembersNoneLife of OrganizationLimited by owner's choice or deathLimited by owners’ choice or deathIndefiniteLiability of owners for business debtsProprietor: Owner is personally liablePartners are personally liableStockholders not personally liableMembers are not personally liableFiduciary liabilityof board membersThis slide compares the various types of business organizations in terms of ownership, life of the organization and liability for business debts.
21 Organization types by the numbers Loads of Sole props, but not so much productionFew Corporations, but producing loads of sales
22 To incorporate or not? Why? You and 700 other people own a chain of craft storesYou are a doctor with your own practiceYou own a skateboard parkYou own & manage a small fruit-standSole Proprietorship or PartnershipIncorporate
23 Accounting concepts and principles 5Accounting concepts and principlesThe sixth learning objective is to apply accounting concepts and principles.
24 GAAP Generally Accepted Accounting Principles US GAAP vs. IFRS Guidelines that govern accountingBased on a conceptual frameworkGoals include:Provide useful information for investment and lending decisionsMust be relevant, reliable, and comparableUS GAAP vs. IFRSRules based vs. principles basedIFRS demonstrates a user biasConvergence and conversionAs mentioned earlier in the chapter, the guidelines that govern accounting fall under GAAP, which stands for generally accepted accounting principles.GAAP rests on a conceptual framework. The primary objective of financial reporting is to provide information useful for making investment and lending decisions. To be useful, information must be relevant, reliable, and comparable. These basic accounting concepts and principles are part of the foundation for the financial reports that companies present.USGAAP is commonly described of as a rules based system. IFRS rely more openly on the judgment of the practitioner to follow the intention of the principles rather than solely following the letter.IFRS consistently favors guidelines that create information useful and understandable to the user, whereas USGAAP has evidence of entrenched rules that may mislead outsiders relying on the financial statements. Two examples are USGAAP’s provision to allow LIFO inventory cost flow, and USGAAP’s reliance on cost basis and book value rather than market values for long term assets.FASB and IASB have been working to alter each rule set to make one common rule set. With the wide spread global adoption of IFRS, the US now appears to be moving toward converting to IFRS than a true convergence of the two systems together.
25 Accounting Principles Entity ConceptFaithful Representation PrincipleCostPrincipleGoing- Concern ConceptStable Monetary Unit ConceptFive important principles provide a foundation for accounting. These are the entity concept, the faithful representation principle, the cost principle, the going-concern concept, and the stable monetary unit concept.
26 Accounting Principles Entity ConceptA business is separate from its ownersFaithful Representation PrincipleAccounting information is complete, neutral, and free from material errorCost PrincipleAssets are recorded at purchase priceUS GAAP reflects decreases, IFRS can reflect increasesAn accounting entity is an organization that stands apart as a separate economic unit. We draw boundaries around each entity to keep its affairs distinct from those of other entities. An entity refers to one business, separate from its owners.Accounting information is based on the fact that the data faithfully represents the measurement or description of that data. This guideline is the faithful representation principle. Faithfully represented data is complete, neutral, and free from material error.The cost principle states that acquired assets and services should be recorded at their actual cost (also called historical cost). The cost principle means list at the amount shown on the receipt—the actual amount paid. Even though the purchaser may believe the price is a bargain, the item is recorded at the price actually paid and not at the “expected” cost.
27 Accounting Principles (continued) Going-ConcernAssumption that business will remain in operation for the foreseeable futureStable Monetary Unit ConceptIn the U.S. amounts are recorded in dollarsThe dollar is considered a stable unit of measureAnother reason for measuring assets at historical cost is the going-concern concept. This concept assumes that the entity will remain in operation for the foreseeable future. Under the going-concern concept, accountants assume that the business will remain in operation long enough to use existing resources for their intended purpose. The going-concern principle assumes the business won’t close soon.The value of a dollar changes over time, and a rise in the price level is called inflation. During periods of inflation, a dollar will purchase less. Butaccountants assume that the dollar’s purchasing power is stable. This assumption is the basis of the stable monetary unit concept. The stable monetary unit concept means stable currency buying power.
28 6The Balance Sheet: the accounting equation, assets, liabilities, and equityThe seventh learning objective is to describe the accounting equation and to define assets, liabilities, and equity.
29 The Accounting Equation ASSETSLIABILITIESEQUITYEconomicResourcesClaims to EconomicResourcesThe basic tool of accounting is the accounting equation. It measures the resources of a business and the claims to those resources. Assets will always equal liabilities plus equity.
30 Assets Economic resources Benefit the business in the future Examples: CashAccounts receivableMerchandise inventoryFurnitureLandAssets are economic resources that are expected to benefit the business in the future. Assets are something the business owns that has value. Cash, merchandise inventory, furniture, and land are examples of assets.
31 Let’s make a company on the board Claims to AssetsLiabilitiesEquityDebts payable to outsidersExamples:Accounts payableSalaries payableBank loansMortgagesUnearned revenueOwners’ claims to the assets of the businessIn a corporation, stockholders’ equityTwo forms:Earned capitalEg: Retained earningsPaid-In CapitalEg: Capital stockClaims to those assets come from two sources. Liabilities are debts payable to outsiders who are known as creditors. Liabilities are something the business owes. For example, a creditor who has loaned money to Smart Touch Learning has a claim to some of the business’s assets until the business pays the debt. Many liabilities have the word payable in their titles. Examples include Accounts payable, Notes payable, and Salary payable.The owners’ claims to the assets of the business are called equity (also called owners’ or shareholders’ equity). Equity equals what is owned (assets) minus what is owed (liabilities). It is the company’s net worth. Stockholders are the owners of the corporation, so owners equal stockholders and owners’ equity equals stockholders’ equity.Let’s make a company on the board
32 Use the accounting equation to analyze transactions 7Use the accounting equation to analyze transactionsThe eighth learning objective is to use the accounting equation to analyze transactions.
33 TransactionAn event that affects the financial position of the businessCan be measured reliablyEvery transaction impacts at least two itemsThe accounting equation balances before and after each transactionAccounting is based on actual transactions, not opinions or desires. A transaction is any event that affects the financial position of the business and can be measured reliably. Transactions affect what the company owns, owes, or its net worth.An accountant records only those events that have dollar amounts that can be measured reliably, such as the purchase of a building, a sale of merchandise, and the payment of rent.
34 Let’s use the accounting equation to make up a business and record some transactions Write up basic accounting equationCreate initial transactions to prepare for businessRecord revenue & expense transactionsTranslate to reportsIf this doesn’t get too messy, we can make some simple financial statements from the data.
35 E1-21: USING THE ACCOUNTING EQUATION TO ANALYZE TRANSACTIONS Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D., P.C. (Professional Corporation), experienced the following events:Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D., P.C.AssetsLiabilitiesStockholders’ EquityDateCashMedical suppliesLandAccounts payableCommon stockRetained earningsJul 6$ 55,000Bal$ 09(46,000)46,000$9,000$46,000$55,000Exercise 1-21 shows you how to use the accounting equation to analyze transactions.
36 E1-21: CONTINUED Assets Liabilities Stockholders’ Equity Date Cash Medical suppliesLandAccounts payableCommon stockRetained earningsJul 12$1,800Bal$9,000$46,000$55,000$01515-318,000$17,000$8,00029(1,600)(900)(100)The exercise continues on this slide.
37 E1-21: CONTINUED Assets Liabilities Stockholders’ Equity Date Cash Medical suppliesLandAccounts payableCommon stockRetained earningsBal$14,400$1,800$46,000$55,000$5,40030(700)$1,10031(1,100)$13,300$ 0The exercise continues on this slide.
38 Prepare financial statements 9Prepare financial statementsThe ninth learning objective is to prepare financial statements.
39 Preparing the Financial Statements Income StatementBalance SheetStatement of Retained EarningsFinancial statements are business documents that report on a business in monetary terms. People use financial statements to make business decisions.After analyzing transactions, we want to see the overall results. The financial statements summarize the transaction data into a form that is useful for decision making. As we discussed the financial statements are the:● income statement,● statement of retained earnings,● balance sheet, and● statement of cash flows.Each financial statement (and every other financial document you’ll probably see or use) has a heading that provides three pieces of data:● Name of the business● Name of the financial statement (income statement, balance sheet, or other financial statement)● Date or time period covered by the statement (April 30, 2013, for the balance sheet; month ended April 30, 2013, for the other statements)The income statement is the first statement that can be prepared because the other financial statements rely upon the net income number calculated on the income statement.Statement of Cash Flows
40 Income StatementThe income statement (also called the statement of earnings or statement of operations) presents a summary of a business entity’s revenues and expenses for a period of time, such as a month, quarter, or year. The income statement is like a video—a moving picture of operations during the period. It displays one of the most important pieces of information about a business: Did the business make a profit? The income statement tells us whether the business enjoyed net income or suffered a net loss. It shows the “bottom line” – net income. Net income is the company’s revenues minus its expenses. If expenses are greater than revenue, it’s called a net loss.The income statement is the first statement that can be prepared because the other financial statements rely upon the net income number calculated on the income statement. A monthly income statement (or statement of retained earnings) for September 2013 shows “Month Ended April 30, 2013.” A quarterly income statement (or statement of retained earnings) for the three months ending June 30, 2013, shows “Quarter Ended June 30, 2013.”
41 Statement of Retained Earnings The statement of retained earnings shows the changes in retained earnings for a business entity during a time period, such as a month, quarter, or year. Retained earnings increase when the business has net income (revenues exceed expenses). Retained earnings decrease when the business has a net loss (expenses exceed revenues), or declares dividends for the shareholders.
42 Balance SheetThe balance sheet lists a business entity’s assets, liabilities, and stockholders’ equity as of a specific date, usually the end of a month, quarter, or year. The balance sheet is like a snapshot of the entity. It is also called the statement of financial position. The balance sheet mirrors the accounting equation.
43 Statement of Cash Flows The statement of cash flows reports the cash coming in (positive amounts) and the cash going out (negative amounts) during a period. Business activities result in a net cash inflow or a net cash outflow. The statement of cash flows reports the net increase or decrease in cash during the period and the ending cash balance.Note that the asterisk in the statement of cash flows indicates that we will learn how to prepare this statement in a later chapter.
44 P1-36A: PREPARING FINANCIAL STATEMENTS Studio Photography, Inc., works weddings and prom-type parties. The balance of retained earnings was $16,000 at December 31, At December 31, 2012, the business’s accounting records show these balances:Prepare the following financial statements for Studio Photography, Inc. for the year ended December 31, 2012:a. Income statementb. Statement of retained earningsc. Balance sheetInsurance expense$ 8,000Accounts receivableCash37,000Note payable12,000Accounts payable7,000Retained earnings?Advertising expense3,000Salary expense25,000Service revenue80,000Equipment50,000Dividends31,000Common stock29,000Problem 1-36A asks us to prepare financial statements based on provided account data.
45 Studio Photography, Inc. P1-36A: CONTINUEDStudio Photography, Inc.Income StatementYear Ended December 31, 2012Revenue:Service revenue$ 80,000Expenses:Salary expense$ 25,000Insurance expense8,000Advertising expense3,000Total expenses36,000Net income$ 44,000First, we prepare an income statement.
46 Studio Photography, Inc. Statement of Retained Earnings P1-36A: CONTINUEDStudio Photography, Inc.Statement of Retained EarningsYear Ended December 31, 2012Retained earnings, December 31, 2011$ 16,000Add: Net income44,000Subtotal$ 60,000Less: Dividends(13,000)$ 47,000The, we prepare a statement of retained earnings.
47 Studio Photography, Inc. P1-36A: CONTINUEDStudio Photography, Inc.Balance SheetDecember 31, 2012AssetsLiabilitiesCash$37,000Accounts payable$ 7,000Accounts receivable8,000Note payable12,000Equipment50,000Total liabilities19,000Stockholders’ EquityCommon stock$29,000Retained earningsTotal stockholders’ equityTotal assets$95,000Total liabilities and stockholders’ equityNext, we prepare the balance sheet.47,00076,000
48 Use financial statements to evaluate business performance 10Use financial statements to evaluate business performanceThe tenth learning objective is to use financial statements to evaluate business performance.
49 Decision Guidelines Statement of Retained Earnings Income Statement Demonstrates profitabilityStatement of Retained EarningsShows changes in retained earningsBalance SheetDemonstrates economic resources as well as debts the company owesEach financial statement can provide a user with valuable information.The income statement provides information about profitability for a particular period for the company. Recall that expenses are listed in this statement from largest to smallest.The statement of retained earnings informs users about how much of the earnings were kept and reinvested in the company.The balance sheet provides valuable information to financial statement users about the economic resources the company owns (assets) as well as the debts the company owes (liabilities). Thus, the balance sheet presents the overall financial position of the company on a specific date. This allows decision-makers to determine their opinion about the financial status of the company.The cash flow statement is covered in detail in a later chapter in the textbook. Briefly, its purpose and value to users is to explain why the net income number on the income statement does not equal the change in the cash balance for the period.Income statement: Earnings powerBalance Sheet: Financial strength/standing
50 Chapter 1 SummaryAccounting is the language of business. Financial statements report a company’s activities in monetary terms.Different users—including individuals, business owners, managers, investors, creditors, and tax authorities—review a company’s financial statements for different reasons. Each user’s goal will determine which pieces of the financial statements he or she will find most useful.Accounting is the language of business. Financial statements report a company’s activities in monetary terms.Different users—including individuals, business owners, managers, investors, creditors, and tax authorities—review a company’s financial statements for different reasons. Each user’s goal will determine which pieces of the financial statements he or she will find most useful.
51 Chapter 1 SummaryMost U.S. businesses follow generally accepted accounting principles (GAAP). If the company is publicly traded, then it must also follow SEC guidelines. If the company operates internationally, then international financial reporting standards (IFRS) will apply. The goal is that, eventually, all public U.S. companies will report using IFRS rules.There are five main forms of business organizations: proprietorships, partnerships, corporations, LLPs/LLCs, and not-for-profits. Each is unique in its formation, ownership, life, and liability exposure.Most U.S. businesses follow generally accepted accounting principles (GAAP). If the company is publicly traded, then it must also follow SEC guidelines. If the company operates internationally, then international financial reporting standards (IFRS) will apply. The goal is that, eventually, all public U.S. companies will report using IFRS rules.There are five main forms of business organizations: proprietorships, partnerships, corporations, LLPs/LLCs, and not-for-profits. Each is unique in its formation, ownership, life, and liability exposure.
52 Chapter 1 SummaryCorporations are formed with a specific state by issuance of a charter. The stockholders own the corporation, but they have no liability for the corporation’s actions.Corporations usually raise capital more easily than other forms of business, but have the disadvantage of additional regulation and additional taxes.The accounting concepts are the underlying assumptions used when recording financial information for a business. Think of the concepts like rules of a game. You have to play by the rules.Corporations are formed with a specific state by issuance of a charter. The stockholders own the corporation, but they have no liability for the corporation’s actions.Corporations usually raise capital more easily than other forms of business, but have the disadvantage of additional regulation and additional taxes.The accounting concepts are the underlying assumptions used when recording financial information for a business. Think of the concepts like rules of a game. You have to play by the rules.
53 Chapter 1 SummaryThe accounting equation must always equal. That is, Assets (what you own) must equal Liabilities (what you owe) + Equity (net worth). In a corporation, equity is composed of paid-in capital (by outsiders) and retained earnings (earnings kept for use by the company).The accounting equation is Assets = Liabilities + Equity. Every business transaction affects various parts of the equation, but after each transaction is recorded, the equation must ALWAYS balance (equal).The accounting equation must always equal. That is, Assets (what you own) must equal Liabilities (what you owe) + Equity (net worth). In a corporation, equity is composed of paid-in capital (by outsiders) and retained earnings (earnings kept for use by the company).The accounting equation is Assets = Liabilities + Equity. Every business transaction affects various parts of the equation, but after each transaction is recorded, the equation must ALWAYS balance (equal).
54 Chapter 1 SummaryFinancial statements are prepared from the ending balances of each account. Each financial statement shows a different view of the company’s overall results.Financial statements are prepared from the transaction analyses (summary of events) reported in each account (Exhibit 1-6) in the order shown in Exhibit 1-7. No one financial statement shows everything about a company. It is the financial statements AND the relationships the statements show that give users the overall picture for a specific company.Financial statements are prepared from the ending balances of each account. Each financial statement shows a different view of the company’s overall results.Financial statements are prepared from the transaction analyses (summary of events) reported in each account (Exhibit 1-6) in the order shown in Exhibit 1-7. No one financial statement shows everything about a company. It is the financial statements AND the relationships the statements show that give users the overall picture for a specific company.
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