| Chapter 1 - Accounting Basics |
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We need a way/method to understand business activities. The accounting approach we use is a double entry system (for every transaction, at least two accounts are affected). To make these accounts more understandable, they are separated and compiled into four financial statements:
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Income Statement
How much did you make in the business? Deals with a period of time General formula: Revenue – Expenses = Net Income
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Balance Sheet
What does your company own? A ‘snapshot’ of what your company has and who owns it Broken into 3 major categories:
Assets Liabilities Owner’s Equity
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The accounting system revolves around a series of common formulas. The most general and fundamental formula is ASSETS = LIABILITIES + OWNER’S EQUTY. What this is really saying is:
Whatever your company possesses (the Assets) is owned either by the Bank (Liabilities) or You (Owner’s Equity).
Think about when you go buy a TV – you can buy it with cash/debit card (Your money/Owner’s Equity) or you can put it on the credit card (which is a short-term loan from the credit card company/bank).
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Warning: Accountants like to use different words to describe the same thing.
For example: ‘Owner’s Equity’, ‘Stockholder’s Equity’, ‘Shareholder’s Equity’, or even just ‘Equity’
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