...Accounting Equation Jarred Evans ACC/300 May 12, 14 Brandy Havens Abstract The purpose of this essay is to give a better understanding of the accounting equation, how the accounting equation relates to the components of the balance sheet, how the components of the accounting equation affect each other and how transactions affect the accounting equation. In business, the accounting equation is used to help us understand how assets, liabilities, and owner’s equity relate to each other along with measures the financial position of a company. The equation is set up as “Assets = Liabilities + Owner’s Equity” for an unincorporated business and “Assets = Liabilities + Stockholder’s Equity” for larger corporations. Assets are the business owned resources, such as money, building, equipment, and inventory. For assets in the equation, it must equal the liabilities plus owner’s equity amount. Liabilities are what companies or small business owe and is considered their duty. “Liabilities can be viewed in two ways, as claims by creditors against the company's assets, and a source—along with owner or stockholder equity—of the company's assets.” Finally, the owner’s equity is what remains after you deduct the liabilities away from the assets. In any transaction, the expressions get altered in order to fit the equation and make the numbers equal properly. “A balance sheet is a financial statement that reports the assets and claims to those assets at a specific point in time” (Kimmel...
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...Brief Exercise BE1-7 Indicate which statement you would examine to find each of the following items: income statement, balance sheet, retained earnings statement, or statement of cash flows. Income Statement (a) Revenue during the period. Balance Sheet (b) Supplies on hand at the end of the year. Statement of Cash Flows (c) Cash received from issuing new bonds during the period. Balance Sheet (d) Total debts outstanding at the end of the period Brief Exercise BE1-8 Use the basic accounting equation to answer these questions. (a)The liabilities of Cummings Company are $90,000 and the stockholders' equity is $230,000. What is the amount of Cummings Company's total assets? (b)The total assets of Haldeman Company are $170,000 and its stockholders' equity is $90,000. What is the amount of its total liabilities? (c)The total assets of Dain Co. are $800,000 and its liabilities are equal to one-fourth of its total assets. What is the amount of Dain Co.'s stockholders' equity? Assets = Liabilities + Stockholders' Equity $ 320000 $ 170000 $ 800000 $ 90000 ]$ 80000 $ 200000 $ 230000 $ 90000 $ 600000 Brief Exercise BE1-9 At the beginning of the year, Fuqua Company had total assets of $800,000 and total liabilities of $500,000. (a)If total assets increased $150,000 during the year and total liabilities decreased $80,000, what is the amount of stockholders' equity at the end of the year? (b)During the year, total liabilities increased...
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...Hi Class, Please let me know specifically if there are problems you are having trouble understanding. If it is just the overall basic principles of accounting, we can go through them until you get the idea. Below is a brief overview: The financial position of a company is measured by the following items: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Owner’s Equity (the difference between assets and liabilities) The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is: Assets = Liabilities + Owner’s Equity The accounting equation for a corporation is: Assets = Liabilities + Stockholders’ Equity If a company keeps accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of a company’s accounts. For example, when a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount. For instance, if the company borrows $10,000, Cash (a normal debit balance account) would be increased (debited, left side) for $10,000, and Notes Payable (this is a normal credit balance account) would be increased for $10,000 (credited, right side). The entry in the General Journal (the record of all...
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...Bank of America had total liabilities of $1,898,945,000 at the end of the 12/31/2011 fiscal reporting year. The liabilities that represented this number included the non-interest bearing deposits, the interest bearing deposits, short term debt, other liabilities, federal funds purchased and securities sold and long term debt. The largest of Bank of America’s liabilities would be the interest bearing deposits while the lowest liability that Bank of America reported was the short term debt which means their operational debt is fairly reasonable. The liabilities that are reported by Bank of America for the previous fiscal year of 12/31/2010 are $2,036,661,000 which is substantially higher than the reporting year of 12/31/2011. The decrease in liabilities for the financial reporting year of 12/31/2011 is a 6.76% decrease from the fiscal year 12/31/2010. This is mainly in part due to decreases in many of the different liabilities not just one. For instance the non-interest bearing deposits were the only journal entry on the balance sheet which showed an increase of liabilities from 2010 to 2011. The non-interest bearing showed a total of $291,301,000 in 2010 with a 14.08% increase from fiscal year 2010 to 2011. The decreases in the liabilities were tremendous for Bank of America in the short term liability area as short term liabilities illustrated a 40.47% decrease from $59,962,000 in fiscal year 2010 to an astonishing $35,698,000 for fiscal year 2011. The decreases were felt...
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...MISSIE DUNLAP HSM/260 DR. MARY JOHNSON WEEK 1 5/25/2013 1. GGAP- (Generally Accepted Accounting Principles) These are a set of rules, standards ,conventions, and procedures that were established by The Financial Accounting board for reporting financial information. www.investorworld.com 2. Basic accounting formula- Assets = Liabilities + Capital This formula is for double entry bookkeeping systems. This formula must always balance so that the company has the assets and funds it needs to operate. www.accountingtools.com 3. Transaction, T-account- is also a set of financial records that also use double entry bookkeeping. The name T-account comes from the appearance of the records. www.investopedia.com 4. Debit and credit- entries made in account ledgers to show changes in value because of transactions made by the business. www.wikipedia.org 5. Trial balance- A list of general ledger accounts, they contain the name of the nominal ledger account, as well as the value. It will hold either a debit or credit balance value. www.wikipedia.org 6. Journal- a file in a book or on a computer of monetary transactions that are entered the first time they are processed. The list is in chronological sequences by date. www.wikipedia.org 7. Assets and liabilities- assets are things you own such as car, house, or business. Liabilities are things that are owed such as mortgage, car payment, and student loans. These can determine...
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...transaction to understand what is happening and how it affects the business. Example, the business has more Revenue, or has more Expenses, or has more Cash, or Owes less to Creditors. Identify the accounts involved, and decide whether the accounts are increased or decrease. Look for Cash first; you will quickly recognize if Cash is coming in or going out. Decide on the Classifications of the accounts involved. (for Example, Equipment is something the business owes, and it's a liability; Rent is an Expense. After recording the transaction, make sure the accounting equation is in balance. THE FIVE CLASSIFICATIONS: Accounts Category Normal Balance Increase Decrease 1. ASSETS DEBIT DEBIT CREDIT 2. LIABILITIES CREDIT CREDIT DEBIT 3. OWNER'S EQUITY CAPITAL CREDIT CREDIT DEBIT WITHDRAWALS DEBIT DEBIT CREDIT 4. REVENUE CREDIT CREDIT DEBIT 5. EXPENSES DEBIT DEBIT CREDIT STEPS IN THE ACCOUNTING PROCESS 1. Record the transactions of a business in a JOURNAL book of original entry - the day - by day record of the trasactions of a firm). Entry should be based on some source document or evidence that a transaction has occurred, such as an invoice, a receipt, or a check. 2. Post entries to the accounts in the LEDGER. Transfer the amounts from the JOURNAL to the Debit or Credit column of the specified accounts in the LEDGER. Use a cross reference system. Accounts are placed in the LEDGER according to the account numbers assigned to them in the CHART OF...
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...Working Capital at Dell 1. How was Dell’s use of working capital a competitive advantage? Dell minimized its working capital as a result of its made-to-order manufacturing process. Dell focused on building computers to fit the orders placed by actual present and already-committed buyers. By building to order, Dell was able to significantly reduce its inventory on hand (in components, work in process and finished goods), accounts payable, and sunk labor costs thus reducing its working capital. By reducing those costs, Dell freed up funds not necessary to run the day-to-day business for other purposes such as expansion or investment. Those funds could also be used to ease/speed purchasing from suppliers as new technology, such as the Pentium chip, developed. Dell’s competitors, meanwhile, repetitively built several lines of stock computers in advance of any customer being identified, let alone committing to buy. As they compiled ever-aging/obsolescing inventory, labor costs, and accounts payable costs, in anticipation of customers that may or may not actually ever present to the company to make a purchase, Dell’s competitors tied up significant funds in working capital. By committing those funds, Dell’s competitors were prevented from using that cash for other purposes. Additionally, as technology improved, these firms were slowed from incorporating the new technology into their products due both to a lack of cash and an inventory of out-of-date products...
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...Lizet Moreno Professor Allen October 7, 2013 Rich Dad Poor Dad In the book rich dad and poor dad basically was summons up that for an individual to be wealthy, one must aim to own the system or means of the production. In other words the book shows you how to strive for success, there is different types of ways to succeed like the book tells you. The rich dad and poor dad both had strong point of views in earning and succeeding in life, in my opinion I would have followed on the same footsteps Kiyosaki did in following his rich dad. It is true when his poor dad says in order to get somewhere in life you have to get a good education and have a secure safe job but that really isn’t the path to become a wealth person. The rich dad’s opinion differ from the poor dad, he said in order to become wealth you first need to understand how money works. Based on the book rich dad poor dad it taught me and changed my mind in how to deal with money and finance. That financial literacy is key, also rather own business instead of work at them. Also it thought me to understand taxes and the power of corporations. One thing that he helped me understood was when he was explaining that the rich don’t work for money; they force money to work for them, when the rich required assets then liabilities. To know the difference an asset and liability, He quoted that “in order to be truly wealthy, your asset column must be robust and able to offset your living expenses” and that most people think...
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...Kamran Burki Build-A-Bear Case – Lease a. Companies lease assets rather than by them because the company might need the asset for only a short period of time. The company might also not want to report an asset or liability or the company simply might not have enough cash to buy the asset. In addition, the company also might have difficulty getting a loan to finance the purchase. b. An operating lease is very similar to a rental agreement. The company does not have ownership of the asset and all the risk and benefits of ownership stay with the lessor. The lessor only transfers the right to use the asset. A lease is considered a capital lease if it meets the following rules: 1) lease life must be greater than 75% of the life of the asset 2) transfer of ownership at the end of the lease term 3) bargain purchase at end of lease term 4) present value of minimum lease payments exceeds 90% of the FMV of the asset A direct financing lease is is defined as a lease where the present value of the lease payments is equal to the cost of the asset. The lessor does not report a gain/loss at the beginning of the lease, but earns interest revenues. A sales type lease is a lease where the present value of the lease payments is greater than the cost of the asset. The lessor records a profit at the beginning of the lease and also earns interest revenue. c. As discussed above, all leases are not the same. Hence, the need to distinguish between different types...
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... income statement, and statement of cash flows. We begin by describing why the fundamental accounting equation is the basis for a firm’s balance sheet. the accounting equation The accounting equation is a simple statement that forms the basis for the accounting process. This equation shows the relationship between a firm’s assets, liabilities, and owners’ equity. ● ● ● ● ● ● Assets are the resources a business owns—cash, inventory, equipment, and real estate. Liabilities are the firm’s debts—borrowed money it owes to others that must be repaid. Owners’ equity is the difference between total assets and total liabilities—what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities. The relationship between assets, liabilities, and owners’ equity is shown by the following accounting equation: Assets = Liabilities + Owners’ equity The dollar total of all of a firm’s assets cannot equal more than the total funds obtained by borrowing money (liabilities) and the investment of the owner(s). Whether a business is a small corner grocery store or a giant corporation such as General Mills, its assets must equal the sum of its liabilities and owners’ equity. To use this equation, a firm’s accountants must record raw data—that is, the firm’s day-to-day financial transactions—using...
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...Identifying Industries Using Common-Size Balance Sheets The table below presents common-size balance sheets for five firms. The firms are: 1. Commonwealth Edison: Generates and sells electricity to businesses and households. 2. Hewlett-Packard: Develops, assembles, and sells computer hardware and printers. The firm outsources many of its computer and printer components. 3. Household International: Lends money to consumers for periods ranging from several months to several years. 4. May Department Stores: Operates department store chains and offers its own credit card. 5. Newmont Mining: Mines for gold and other minerals, utilizing heavy equipment. Use whatever clues that you can to match the companies listed above with the firms listed in the exhibit. 1. Commonwealth Edison as stated generates and sells electricity of businesses and households. I would link this company with the second balance sheet and I have several clues that support this: first the level of inventories is very low, 2.0 % of total assets, which is usual for a company with this type of operations. Second, the level of PPE is very high, 74, 3 % of total assets, which includes all the heavily equipment used to generate and distribute electricity. The long term debt is high, 47, 7 % of total assets, which can be explained with the huge long term investments that need to be done in this industry. 2. Hewlett-Packard or HP can be linked with the fifth balance sheet and I base this conclusion...
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... 3. In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. b. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Topic. Also goodwill shall be measured in whole because the acquiring entity is responsible for all of the acquiree’s assets and liabilities regardless of percentage owned. This means goodwill be measured for the acquiring entities portion and the non-controlling portion as well and presented on the balance sheet as a single figure of both controlling and noncontrolling portions combined. This section is taken from Deloitte’s A Roadmap to Accounting for Business Combinations and Related Topics example 5-4: Cash transferred by acquiring entity + fair value of contingent consideration agreement (if applicable) = total consideration transferred by acquiring entity + fair value of the non-controlling interests (if applicable) + fair value of acquiring entity’s previously held interest in acquiree entity (if applicable) = subtotal – fair value of net assets acquired = goodwill 2. If the costs of the assets and liabilities exceed their fair values costs will be assigned to goodwill by there is no way to measure the fair value of the overpayment as of yet; subsequent impairment testing on goodwill when overpayment first arises is the best method to...
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... 2. The recording process becomes more efficient and informative if all transactions are recorded in one account. 3. When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers. 4. An account is often referred to as a T-account because of the way it is constructed. 5. A debit to an account indicates an increase in that account. 6. If a revenue account is credited, the revenue account is increased. 7. The normal balance of all accounts is a debit. 8. Debit and credit can be interpreted to mean increase and decrease, respectively. 9. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. 10. A credit balance in a liability account indicates that an error in recording has occurred. 11. The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement. 12. Revenues are a subdivision of retained earnings. 13. Under the double-entry system, revenues must always equal expenses. 14. Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts. 15. Business documents can provide evidence that a transaction has occurred. 16. Each transaction must be analyzed in terms...
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...Since the end of Urban Outfitters last fiscal year, there has been a moderately significant change to their debt ratio. At the end of January 31st, 2011 their debt ratio was at .21 percent. One year later at the end of the most recent fiscal year, the debt ratio was .28 percent. There are very significant changes to Urban Outfitters total assets and total liabilities over the past two fiscal periods. At the end of the fiscal year in 2011, Urban Outfitters had 382.2 million dollars in liabilities and 1,794.3 million dollars in assets, compared to 417.4 million dollars in liabilities and 1,483.7 million dollars in assets. How did these huge changes occur in just one year? Urban Outfitters Cash and Cash Equivalents took a huge hit going from 345.3 million to 145.3 million. That accounts for almost all of the difference in their total assets, while every other asset column has small changes that add up. There was not a significant change in the total liabilities. Urban Outfitters had a drastic decrease in there total assets and a small increase to their total liabilities, which explains why the debt ratio changed the way it did. After reading these numbers and seeing the huge loss in assets, it would be safe to assume that Urban Outfitters was really struggling opposed to the industry norm. However that assumption is not correct, the .07 change is not too out of the ordinary of a change compared to the industry norm. The industry norm change was a raise in .06 percent, so there...
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...CHAPTER STUDY OBJECTIVES 1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity. 2. Explain what an account is and how it helps in the recording process. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. 3. Define debits and credits and explain how they are used to record business transactions. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits. 4. Identify the basic steps in the recording process. The basic steps in the recording process are: (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger. 5. Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction,...
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