Financial Accounting - Module 1: Understanding Financial Statements

Introduction

• Focus: Understanding terminology and jargon essential for financial statements
• Key Insight: Accounting is the language of business; knowing key terms is crucial
• Six Key Terms:
  • Assets
  • Liabilities
  • Shareholders’ Equity
  • Revenues
  • Expenses
  • Dividends

Assets

• Definition: Anything of value that a company owns or controls, providing future economic benefit
• Examples of Student Assets:
  • Cell phone, textbooks, car (easy to measure)
  • Beauty, youth, high school diploma (valuable but hard to measure)
• Technical Definition: Own or control from a past transaction; measurable
• Common Company Assets:
  • Cash
  • Accounts receivable (money owed to the company)
  • Inventory (goods bought for sale)
  • Property, Plant, and Equipment (land, buildings, equipment)
  • Investments (e.g., purchase of Instagram by Facebook)

Liabilities

• Definition: Obligations that must be repaid in the future
• Examples:
  • Student loans, phone bills, mortgage
• Common Liabilities on Balance Sheets:
  • Accounts payable (similar to a phone bill, typically due within 30 days)
  • Notes payable (bank loans, student loans, mortgages)
  • Wages payable, bonuses payable

Shareholders’ Equity

• Definition: What remains after selling all assets and paying all liabilities; the owner’s share
• Example:
  • A $300,000 house with a $200,000 mortgage results in $100,000 equity
• Accounting Equation: Assets = Liabilities + Shareholders' Equity (A = L + SE)
• Types of Equity Accounts:
  • Common shares, preferred shares, share capital
  • Retained earnings (profits kept in the company versus paid out as dividends)

Revenues

• Definition: Income earned by the company performing its business operations
• Examples:
  • Sales revenue, tuition revenue, rent revenue

Expenses

• Definition: Costs incurred in the process of earning revenue
• Examples:
  • Salaries, utilities, maintenance

Dividends

• Definition: Shareholder withdrawals of profits from the company
• Consideration: If profitable, shareholders can choose to retain earnings or take dividends

Conclusion

• Key Understanding: Ingrain these six terms to tackle financial accounting effectively
• Next Steps: Prepared to proceed with Chapter 1, Module 1 with this foundational knowledge
• Encouragement: Venture further into accounting with this understanding of key terminology