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Assistant Professor in
Finance Management,
HIPA,Ggn.
Fundamentals of Accounting-Understanding five
heads
Liabilities
Equity/Capital
Asset
Liability
Expense
Revenue
Owners
Equity
Accounting is a game
Assets
Liablitie
s
Capital
Fundamentals of Accounting-Understanding five
heads
Liability
Obligation to transfer assets in the future
Owners Equity
Owners interest in the company
Revenue
Increase in economic resources resulting from normal
Expense
Decrease in economic resources resulting from normal
Element structures
Assets
Current assets
Cash
Cash on hand
Bank accounts
Accounts receivable
Inventory
Raw materials
Work in process
Finished goods
Product 1
Product 2
Fundamentals of Accounting-Understanding five
heads
Element structures
Assets
Current assets
Long-term assets
Buildings
Vehicles
Cars
Trucks
Element structures
Liabilities
Current liabilities
Accounts payable
Accrued liabilities
Long-term liabilities
Bank loans
Loan from RBI
Loan from Private banks
Notes payable
Bonds payable
Fundamentals of Accounting-Understanding five
heads
Element structures
Owners equity
Capital stock (direct investment)
Retained earnings (indirect investment)
Revenue
Expenses
(Dividends)
Element structures
The balance sheet is a permanent statement
Its accounts accumulate information from the entitys
beginning.
The amounts presented on the balance sheet are aggregated from the
entitys beginning to the balance sheet date.
The amounts presented on the income statement are aggregated from the
beginning of the period to the end of the period only.
Fundamentals of Accounting-Understanding five
heads
Element structures
The Closing Entry
Whenever financial statements are to be prepared, the
temporary (income statement) accounts must be closed
to zero so that they can begin tracking data for the next
period.
The amounts in the accounts at closing are transferred to
Element structures
The Closing Entry
The result of the closing entry is that all impacts on
Revenue and Expenses (the temporary accounts) are
indirectly impacts on Retained earnings (a permanent
account).
That is how A = L + OE stays in balance.
Credit
Liabilities
Current liabilities
Long-term liabilities
Credit
Direct investment
Capital stock
Indirect investment
Dividends (debit)
Retained earnings
Revenue (credit)
Expense (debit)
Financial Statements
There are 2 statements in a standard set of financial
statements
1.
Balance Sheet
2.
Income Statement
Company Name
Income statement
For year ended December 31, 2003
Financial Statements
Revenue
100,000
Expenses
Salaries
Utilities
Rent
Other
45,000
13,000
30,000
8,000
-
Net Income
Company Name
Statement of Retained Earnings
For year ended December 31, 2003
Assets
Current assets
Long-term assets
3,000
40,000
Total Assets
43,000
96,000
4,000
Company Name
Balance Steet
As at December 31, 2003
Liabilities
Current liabilities
Long-term liabilities
Owners' Equity
Capital stock
Retained Earnings
3,500
4,000
500
15,000
20,000
35,000
1,000
7,000
8,000
7,000
43,000
Company Name
Income statement
For year ended December 31, 2003
Financial Statements
Revenue
100,000
Expenses
Salaries
Utilities
Rent
Other
45,000
13,000
30,000
8,000
-
Net Income
Company Name
Statement of Retained Earnings
For year ended December 31, 2003
Assets
Current assets
Long-term assets
3,000
40,000
Total Assets
43,000
96,000
4,000
Company Name
Balance Steet
As at December 31, 2003
Liabilities
Current liabilities
Long-term liabilities
Owners' Equity
Capital stock
Retained Earnings
3,500
4,000
500
15,000
20,000
35,000
1,000
7,000
8,000
7,000
43,000
Financial Statements
Company Name
Income statement
For year ended December 31, 2003
Company Name
Balance Steet
As at December 31, 2003
Revenue
100,000
Expenses
Salaries
Utilities
Rent
Other
45,000
13,000
30,000
8,000
-
Net Income
Company Name
Statement of Retained Earnings
For year ended December 31, 2003
3,000
40,000
Total Assets
43,000
96,000
4,000
Assets
Current assets
Long-term assets
Liabilities
Current liabilities
Long-term liabilities
Owners' Equity
Capital stock
Retained Earnings
3,500
4,000
500
15,000
20,000
35,000
1,000
7,000
8,000
7,000
43,000
To Balance Sheet
From Statement of
Retained Earnings