ASSETS = LIABILITIES + SHAREHOLDERS EQUITY
CHANGE IN RETAINED EARNINGS = NET INCOME DIVIDENDS
Debits on left & Credits on right
Information system which records summarizes and reports the underlying
economic conditions of an entity
Used by both those inside the entity and outside to understand the entity.
Used to make decisions
Financial statements-management reports to owners.
1. Revenue/liabilities/equity: Things that increase net earnings therefore
increase retained earnings. Normally have Credit balances
2. Expenses/Assets: Things that decrease net earnings. Normally have Debit
- Product expense (COSG): match to revenue
- Period expense (wages, insurance, etc.): match with the passage of time
Revenues/Expenses vs. Gain/Loss
1. Expenses/Revenues: inflows/outflows from product you sell
2. Gain/Loss: assets or programs that are sold/bought for a profit when it is
sold/bought for MORE than what is on the sheet. (ex. Securities for a product,
trucks sold that were not needed anymore)
Forms of Organizations
1. Sole Proprietor
Shareholders buy stock & Elect board of directorsWho hire Management
who run the company
Types of Corporations
1. Small private
2. Large private
3. Large Public
1. In corporation Shareholders equity
(Investments by Shareholders in the form of Cash or Assets) Retained Earnings
1. Found on Statement of Retained Earnings
2. Income earned by the company and not paid out to the shareholders in
3. What the company did with the income it make for the year.
- Pay out to shareholders as dividends
- Retain it in the company for future use
4. Balance Sheet: accounts are permanent the balances carry forward from year
St. of Earnings: Want to start from 0 every year. Need to reset accounts to 0.
Retained earnings: Need to record Net Earnings in Retained Earnings.
5. Net Earnings = Revenues Expenses
Message to Shareholders, Corporate Profile, Financial Section (management
statement of responsibility, audit report, financial statements)
General Accepted Accounting Principles
1. Basic Principles of GAAP:
- Accrual Accounting (revenues & expenses recognized based on
performancenot when the cash flow occurs)
- Revenue Recognition (revenue matched to period it was earned)
- Matching (match expenses to revenues)
2. Set of accounting recommendations and guidelines used to prepare financial
3. Provides acceptable alternatives for recording, measuring, summarizing and
reporting accounting transactions & info.
3 Areas in a Successful Business
1. Financial Decisions how do I pay for it? Where does the money go?
2. Investing Decisions What to make? What service to provide? What to buy?
3. Operating Decisions How do I handle credit? How quickly do I pay?
1. Statement of earnings
2. Statement of Retained Earnings (statement of changes in shareholders
3. Balance Sheet (statement of financial position)
4. Statement of Cash Flows
* Managers & Auditors
Statement of Earnings1. Sales/Revenue
2. Cost of Goods sold
3. Gross profit or margin
4. Other expenses (depreciation, interest, SG&A, operating income)
5. Income before Taxes
6. Income taxes
7. Net earnings/income
Balance Sheet (What is available to be spent)
1. What the company OWNS Assets (controlled by entity, future economic
benefit to company, event that gave the company control has happened)
- Cash, receivables, inventory, equipment
2. What the company OWES Liabilities
- Payables, bank loans, mortgages
3. Who invested what Creditors and Shareholders
- Share capital, retained earnings, dividends paid to shareholders/owners
1. Income statement based on the concept of Accrual Accounting (measuring
- When sal