Introduction to financial accounting notes

You can see that these three terms are interconnected, and their interconnectionВ produces an equation that is at the heart of all financial accounting: The Accounting Equation.

Net assets is the difference between the total assets and total liabilities.В When the owners are shareholders, the interest can be called shareholdersвЂ™ equity the accounting remains the same, and it is ownership equity spread out among shareholders. OwnerвЂ™s equity consists of the net assets of an entity.

Equity:В EquityВ is the difference between the value of the assets and the amountВ of the liabilities of something owned.

Liabilities include things like loans, monies owed to suppliers orВ creditors that the business will use assets (i.e., cash) to settle.

Liability: AВ liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events,В the settlement of which may result in the transfer or use of assets, provision of services, or other yielding of economic benefits in the future.

Assets include things like cash, vehicles, buildings, equipment, patents, and debts owed to the company. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). Anything tangible or intangible that can be owned or controlled to produce value and that is held to have positive economic value is considered an asset.

Asset:В An asset is an economic resource.

Just asВ a financial accountant would do, we will use these figuresВ to prepare the companyвЂ™s financial statements required by GAAP.Д«efore we start, we need to define threeВ terms and an equation that are used throughout the accounting process.

In order to get a better understanding of financial statements, what they communicate to the users of accounting information, and how the statements are connected, we will use theВ final balances as ofВ January 31, 20XX forВ a fictitious delivery-service company, Metro Courier Inc. The following video summarizes the four financial statements required by GAAP. Statement of Retained Earnings-also called Statement of OwnerвЂ™s Equity.After all of the income and expenses of the business have been recorded, financial accountants prepare financial statements in the following order: The statement of cash flowsВ shows the cash inflows and outflows for a company duringВ a period of time.ДЇinancial statements are summative reports in that they report information obtained from the day-to-day bookkeeping activities of financial accountants or bookkeepers. The balance sheet reflects a companyвЂ™s solvency and financial position. The statement of ownerвЂ™s equity-also called the statement of retained earnings-shows the change in retained earnings between the beginning and end of a period (e.g., a month or a year). The financial statement that reflects a companyвЂ™s profitability is the income statement.

Together these statementsВ represent the profitability and financial strength of a company.

Explain how the balance sheet, income statement, statement of ownerвЂ™s equity, and statement of cash flows are connectedДЇinancial statements are the means by whichВ companies communicate their story.

Identify the use and components of the statement of cash flows.

Identify the use and components of the statement of ownerвЂ™s equity.

Identify the use and components of the income statement

Identify the use and components of the balance sheet.

Introduction to financial accounting notes