WEEK 2 The-Accounting-Equation-Balance-Sheet-and-Income-Statement.pptx

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