Understanding Basic Financial Statements Companies report their financial activities in four basic financial statements under generally accepted accounting principles (GAAP). The four basic financial statements are as listed below: 1. The balance sheet shows in a tabular form, the asset, liability and owners’ equity of a company, at a particular time. The assets of a company will always equal to the sum of liabilities and owners’ equity, this is called the accounting equation. i.e Asset = liability + Owners Equity 2. The income statement gives details of executed transactions which contributed positively or negatively to the owners’ equity. These transactions can bring about an increase or reduction in the owners’ equity. The income …show more content…
Every transaction, because of its financial impact, affects the financial statements of the business. Financial statements can be prepared after 1, 2, or any number of transactions. Every transaction has two sides: the giving side and the receiving side The record used to capture events that has financial impact on each asset, liability, and stockholders’ equity is called the account. The account is the basic summary device of accounting. An account is the record of all the changes in a particular asset, liability, or stockholders’ equity during a period. Assets can be defined as economic resources owned or controlled by the firm that deliver a future benefit for a business. They are acquired by the firm as a result of a past event or transaction. Assets that can be converted to cash within a short term like cash at hand/bank, inventories, are call short-term or current assets. Property, plant and equipment are categorized as long term asset The following asset accounts are mostly used: Cash, Accounts Receivable. Notes Receivable, Inventory, Prepaid Expenses. Land, Buildings, Equipment, Furniture, and Fixtures. Liabilities is a debt. An obligation to another party is a liability. The most common types of liabilities include: Accounts Payable, Notes Payable, and Accrued Liabilities. Liabilities arises from
In the world of business, it is crucial to keep track of revenues and expenses in order to evaluate the economic condition of one’s business. Other than revenues and expenses, accountants must also document the changes within a business’s assets and liabilities. Changes in assets and liabilities affect the owner’s equity. The revenue and expense accounts are recorded in the income statement, while assets, liabilities, and owner 's equity are recorded in the balance sheet. The balance sheet and income statements make up the general ledger.
A balance sheet gives an overall picture of a company's financial situation by showing the total assets of a business, including liabilities plus equity. Current assets can include cash, accounts receivable, inventory and prepayments for insurance. The balance sheet is used by investors to get an idea of what the shareholders have invested, including
Assets are to be recorded and valued based of the type of asset there are.
A current liability is defined as a liability that must be paid within one accounting period.
The accounting equation: Assets = Liabilities + Owner’s Equity. Assets are the resources of the company. Examples include cash, land, buildings, and equipment. Liabilities are “outsider claims”, the company’s obligations to creditors. Examples include accounts payable, notes payable, and income taxes payable. Owner’s Equity represents “insider claims” of the company or the owner’s share of the assets. If a business is keeping accurate records this equation should always be in balance.
“Assets are economic resources that have expected future benefits to the business” (Baker, 2014). There are short and long term assets. Short-term assets are assets that will be utilized within a year. Examples of short-term assets are cash, inventory, and accounts receivable. Long-term assets are assets that will continue to beneficial longer than a year. Examples of long-term assets are buildings, land, and equipment.
Assets and liabilities are bifurcated in current and non-current. Current asset is defined as any asset which can be converted into cash readily and will be used within one accounting period normally 1 year e.g. Receivables, Inventory, Prepaid Expenses.
Asset Account – Can be organized into current and non-current category. Types of current accounts would be goods owned by a company with the result of selling items or a written note(s) receivable, in which a promise is made to repay services rendered. A non-current item is any item used for the efficient running of a company such as equipment like computers. This referred to as a fixed asset. (MyAccountingCourse.com, n.d.)
An obligation that legally binds an individual or company to settle a debt. When one is liable for a debt, they are responsible for paying the debt or settling a wrongful act they may have committed. For example, if John hits Jane 's car, John is liable for the damages to Jane 's vehicle because John is responsible for the damages. In the case of a company, a liability is recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.
The balance sheet shows the firm’s financial position with respect to assets and liabilities at a specific point in time. An example of a balance sheet is presented in Table….. The balance sheet provides three types of information: assets, liabilities, and owners’ equity. Assets are what the company owns, and they include current assets those that can be converted
These liabilities are described as what the business or organization owes such as accounts payable, payroll taxes due, notes payable, and mortgages payable are all liabilities. Assets are economic resources that have expected future benefits to the business (Baker & Baker, 2000). It is described as what the business or organization owns or controls. This can include cash, accounts receivable, notes receivable, and inventory.
The company has capital, which are loans and shares. The liabilities are finances and debt. These two together equal the assets. Some items include, cash, inventory, machines, computers, even desks and chairs. Everything the company has, assets, belongs to somebody else, liabilities, or to the company 's owners, capital (Sink, Pg. 2).
Each user of the financial statements interprets the information in a different manor. They use the information to determine their interactions with the organization. Management, investors, and employees use the same information from the financial statements but for different purposes. These four basic statements are the fundamentals of accounting which can be much more detail and complex. They do not need to be more complex for the users of the information; these basic statements have all the information needed to make
A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. In British English including United Kingdom company law a financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants.
Assets. It is defined as probable future economic benefits obtained or controlled by a particular entity as a result of pass transaction or event. Any owned physical object (tangible) or right (intangible) having economic value to its owners; an item or source of wealth with continuing benefits for future periods, expressed, fro accounting purposes, in terms of its cost, or other value, such as current replacement cost. Future periods refer to the following year or years (Peterson, 2002).