Financial Accounting Module 1

Jul 10, 2024

Financial Accounting

Module 1: The Financial Statements

Introduction to Financial Statements

  • Understanding of financial statements prepares and involves understanding terminology.
  • Accounting is not just about numbers; it is the language of business.
  • It is crucial to understand 6 key terms.

Six Key Terms

  1. Assets
  2. Liabilities
  3. Shareholders' Equity
  4. Revenues
  5. Expenses
  6. Dividends

Detailed Description of Key Terms

Assets

  • Definition: Anything of value that a company owns or controls.
    • Technical definition: Anything created from a past transaction that gives a future economic benefit.
    • Key examples for companies: Cash, accounts receivable, inventory, property, plant, equipment, investments.
  • Simplified Definition: Things of value.
  • Examples can include:
    • Personal examples: Cell phone, textbook, car (easier to value); high school diploma, youth, beauty (harder to put a number on).

Liabilities

  • Definition: Anything that has to be repaid in the future.
    • Technical definition: Any future economic obligation to repay.
  • Simplified Definition: Owe.
  • Key examples for companies: Accounts payable, notes payable (bank loans, mortgages), wages payable, bonuses payable.
  • Personal examples: Student loans, unpaid bills.

Shareholders' Equity

  • Definition: The owners' piece of the pie. What is left over after selling all assets and paying off all debts.
    • Technical definition: Assets = Liabilities + Shareholders' Equity (A = L + SE)
  • Simplified Understanding: Owners' piece of the pie.
  • Real-world analogy: House worth $300,000 with $200,000 mortgage means $100,000 equity.
  • Key accounts: Common shares, preferred shares, retained earnings.

Revenues

  • Definition: The income earned from doing what the business does.
  • Simplified Definition: Earn.
  • Examples: Sales revenue, tuition revenue, rent revenue.

Expenses

  • Definition: The costs incurred to earn revenues.
  • Simplified Definition: Costs.
  • Examples: Salary expenses, utilities expenses, maintenance expenses.

Dividends

  • Definition: The distribution of profits to shareholders.
  • Simplified Understanding: Shareholders pulling profits out of the company.
  • Decision point: Retain earnings in the company or pay out dividends.

Recap of Six Key Terms

  • Assets: Things of value a company owns or controls.
  • Liabilities: The company’s obligations or debts.
  • Shareholders' Equity: What’s left for shareholders after all debts are paid.
  • Revenues: Money earned by the company for its activities.
  • Expenses: Costs incurred in earning that money.
  • Dividends: Profits distributed to shareholders.

Final Note

  • Understanding these six terms is crucial for success in accounting.
  • Ready to tackle Chapter 1 and Module 1 with this foundational knowledge.