WEEK 2 The-Accounting-Equation-Balance-Sheet-and-Income-Statement.pptx
Shabera Treasure-Jacobs (Ed.D Candidate,
Created on September 4, 2024
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Transcript
by Shabera Jacobs
Welcome to Week 2 of our accounting course. We'll explore fundamental concepts that form the backbone of financial reporting. These principles are essential for understanding a company's financial health and performance.
The Accounting Equation, Balance Sheet, and Income Statement
Learn to categorize accounts on both the balance sheet and income statement.
Classify Financial Accounts
Examine how the accounting equation relates to the balance sheet structure.
Analyze Balance Sheet Relationships
Grasp the components and importance of the foundational accounting equation.
Understand the Accounting Equation
Learning Objectives
Every business transaction affects at least two accounts within this equation.
Transactions
It ensures that both sides of financial records always balance.
Balance
The accounting equation is the cornerstone of double-entry bookkeeping.
Foundation
The Accounting Equation
Owner's interest in the business, representing their financial stake.
Equity
Obligations owed to creditors, including loans and accounts payable.
Liabilities
Resources owned by the business, such as cash, inventory, and equipment.
Assets
Components of the Accounting Equation
Total assets remain unchanged, maintaining the equation balance.
Equation Balanced
Cash (asset) decreases by $5,000.
Asset Decrease
Equipment (asset) increases by $5,000.
Asset Increase
Company buys a $5,000 computer with cash.
Purchase Equipment
Real-World Example
This statement helps stakeholders assess the company's financial health and stability.
Decision Making
It displays assets, liabilities, and equity, reflecting the accounting equation.
Key Sections
The balance sheet provides a point-in-time view of a company's financial position.
Financial Snapshot
The Balance Sheet Overview
Long-term Investments
Accounts Receivable
Equipment
Inventory
Property
Cash
Non-Current Assets
Current Assets
Assets on the Balance Sheet
Long-term obligations extending beyond one year, including long-term debt and bonds payable.
Non-Current Liabilities
Short-term obligations due within one year, such as accounts payable and short-term loans.
Current Liabilities
Liabilities on the Balance Sheet
Equity is calculated as Assets minus Liabilities.
Equation
Includes capital contributed by owners and retained earnings from operations.
Components
Represents the owner's financial interest in the business.
Owner's Equity
Equity on the Balance Sheet
Unlike the balance sheet, it covers a range of time, typically a month, quarter, or year.
Time Frame
It includes revenues, expenses, and the resulting net income or loss.
Components
The income statement shows a company's financial performance over a specific period.
Purpose
Income Statement Overview
Income from secondary activities, including interest earned or gains from asset sales.
Non-Operating Revenue
Income generated from primary business activities, such as sales of goods or services.
Operating Revenue
Revenue Classification
Expenses can also be categorized based on their behavior relative to business activity.
Fixed vs. Variable
Costs not tied to primary operations, such as interest on loans.
Non-Operating Expenses
Costs directly related to core business operations, like salaries and rent.
Operating Expenses
Expense Classification
The difference represents the company's profit or loss.
Net Income Result
Deduct all expenses incurred during the same period.
Subtract Expenses
Sum of all income sources for the period.
Total Revenue
Net Income Calculation
Reconciles income to cash, explaining changes in the balance sheet.
Cash Flow Statement
Net income affects retained earnings in the equity section.
Balance Sheet
Reports net income or loss for the period.
Income Statement
Interrelationship Between Financial Statements
The Income Statement
Statement of Changes in Equity
The Balance Sheet
The Statement of Cash Flows (SCF)
Recognize revenue and expense classifications for performance analysis.
Income Statement
Know how to classify and interpret assets, liabilities, and equity.
Balance Sheet
Understand Assets = Liabilities + Equity as the foundation of accounting.
Accounting Equation
Recap and Key Takeaways