Financial Accounting Module 1: Introduction to Financial Statements

Overview

• Focus on understanding terminology before preparing and understanding financial statements.
• Accounting is often referred to as the "language of business."
• Six key terms to understand: Assets, Liabilities, Shareholders Equity, Revenues, Expenses, Dividends.

Key Terms

Assets

• Definition: Anything of value that is owned or controlled by a company, providing future economic benefits.
• Examples in Personal Context: Cell phone, textbook, car.
• Examples in Business Context: Cash, accounts receivable, inventory, property (land, buildings), plant, equipment, investments.
• Important Note: Assets must have a reliable measure of value (e.g., cars, phones) whereas items like beauty or youth don't appear on financial statements due to measurement challenges.

Liabilities

• Definition: Obligations that a company has to repay in the future.
• Examples: Student loans, phone bills, mortgages.
• Business Examples: Accounts payable, notes payable (including bank loans), wages payable.
• Key Concept: Future economic obligations.

Shareholders' Equity

• Definition: The owner's claim after all liabilities have been paid; what's left for shareholders.
• Example: Home ownership—difference between house value and mortgage.
• Accounting Equation: Assets = Liabilities + Shareholders' Equity (A = L + SE).
• Components:
  • Common shares
  • Preferred shares
  • Retained earnings: Reflects profits kept in the company.

Revenues

• Definition: Money earned by the company from its operations.
• Examples: Sales revenue, tuition revenue, rent revenue.
• Keyword: Earn.

Expenses

• Definition: Costs incurred in the process of earning revenues.
• Examples: Salary expense, utilities expense, maintenance expense.
• Keyword: Costs.

Dividends

• Definition: Profits distributed to shareholders from retained earnings.
• Concept: Decision made by shareholders to take profits out of the company.

Conclusion

• Understanding these six terms is crucial for progressing in financial accounting.
• They form the basis for understanding the preparation and interpretation of financial statements.

---

• Approach further learning with these foundational terms ingrained.
• Ready to tackle Chapter 1 and continue learning about accounting.