Understanding a Balance Sheet: Assets, Liabilities, and Equity of Rivendell, Inc., Apuntes de Administración de Empresas

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Introduction to Accounting

T2: The Accounting Equation

Instructor: Dr. Sotirios Karatzimas

Learning Objectives T

• To introduce:
  • The Accounting equation,
  • The Balance Sheet,
  • The Income Statement (Profit and Loss Account),
  • The Statement of Retained Earnings,
  • The Statement of Retained Earnings,
  • The Cash Flow Statement.
• To get familiar with:
  • The analysis of business transactions.

Financial Position

 Financial position refers to a company’s

 economic resources (e.g. cash, inventory, and buildings) and  the claims against those resources at a particular time.time.  Two types of claims: creditors’ (e.g. bank loans), and owner’s. Economic Resources = Creditors’ Claims+ Owner’s Claims

The Accounting Equation

• In accounting terminology:

1. economic resources  assets
2. creditors’ claims  liabilities 3.3. owners’ claimsowners’ claims  equityequity

• The accounting equation:

Assets = Liabilities + Owner’s Equity

Asset Examples

• Cash and Cash Equivalents

• Accounts Receivable

• Inventories

• • Property, Plant and EquipmentProperty, Plant and Equipment

Liabilities

 Liabilities are a business’s present obligations to

pay cash, transfer assets, or provide services to

other entities in the future. They include:

• amounts to suppliers for goods or services bought on credit (calledcredit (called accounts payableaccounts payable))
• borrowed money such as bank loans
• salaries and wages owed to employees
• taxes owed to the government
• services to be performed

Outsider

Claims

Expected Future

Sacrifice

Equity

• The claims of the owners.
• In Corporations owners are the Shareholders of

the firm.the firm.

• Equity is called Shareholders’ Equity.
• In other forms of business (proprietorship,

partnership) is called Owners’ Equity.

Owners’ Equity

OWNERS’ EQUITY INCREASES Owners’ contributions OWNERS’ EQUITY DECREASES Owners’ withdrawals Revenues Owners’ Equity Expenses

Shareholder’s Equity Components

• Shareholder’s Equity

• Paid-in Capital
  • Common Stock
• Retained Earnings The amount the stockholders have invested in the corporation. The basic component is common stock, which the corporation issues to the stockholders as evidence of their ownership.
• Retained Earnings
  • Revenues
  • (Expenses) Resource^ • (Dividends) outflows that decrease retained earnings due to operations. Distributions to stockholders (usually cash) generated by net income. Inflows of resources that increase retained earnings by delivering goods or services to customers

Retained Earnings

Increased by

• Revenues

Decreased by

• Expenses
• Dividends

Answer

AssetsAssets LiabilitiesLiabilities

EquityEquity € 360 € 210 € 1.

600 220 € 770

560 € 410

Your Turn

1. A firm’s Assets are €360.000 and its Liabilities

are €120.000. How much is the Equity?

2.2. A firm’s Equity isA firm’s Equity is €€180.000 and its Liabilities180.000 and its Liabilities

are €100.000. How much are the Assets?

Current Assets

• Expected to be converted to cash, sold, or

consumed during the next 12 months (or within

the business’s operating cycle if longer than a

year)

• Include:
  • Cash and cash equivalents
  • Short-term investments
  • Accounts and notes receivable
  • Inventory
  • Prepaid expenses

Current Assets

• Cash and cash equivalents

• Short-term investments

• Accounts and notes receivable

• Inventory

Cash is the liquid asset that’s the medium of exchange

• Inventory

• Prepaid expenses

Cash equivalents include money-market accounts or other financial instruments easily convertible to cash