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Chapter 2

ACC 100 Chapter 2: Accounting Equations

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ACC 100
Maurizio Di Maio

Chapter 2 Accounting Equations Financial Information: Both the preparers and users of financial information have objectives and need financial information to meet these objectives Financial Data = the recorded business activities of a companys daytoday operations Financial Data Financial Information; financial data becomes financial information after data is processed, and only then can it be used for decision making The process of changing financial data into financial information is carried out by the accounting system Accounting System = an information system that collectsgroupscommunicates a businesss financial position, including its financial health and prosperity; the end result of a businesss accounting system is financial information is the form of financial statements Financial Statements = provide a businesss financial performance, current financial position, and cash flows GAAP allow businesses to use accounting systems to turn financial data into financial information by specifying the financial reporting elements that business activities are divided into The first step in the accounting system is to collect and group business activities into financial reporting elements and record them using accounting equations Financial Reporting Elements: Assets = provide future economic benefit to the company as they are used to generate revenue; transfer of ownership has already occurred Liabilities = owed to third parties, will be repaid in the future through the giving up of cashgoodsservices Equity = wealth owed to the owners of a business; made up of the following items: Owners Capital = owners money that has been invested into the business Retained Earnings = annual profit minus dividends Dividends = profit paid out to ownersshareholders Revenue = income earned by a business by providing goodsservices Expenses = the cost of resources that are consumedincurred to help generate revenue Interrelationship between Financial Reporting Elements: Assets = Liabilities + Equity Equity = Owners Capital + Retained Earnings Retained Earnings = Profit Dividends
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