Chapter 1 Tricks and Notes

"Why are you taking accounting? -- "because it is required”? Hopefully, as we progress through the chapters, you will see the knowledge you obtain is a tool for making good personal and business decisions. Not only does accounting provide information for management decisions but also for stakeholders in the business – creditors, investors, stockholders, employees, and the government.

Accountants should use Generally Accepted Accounting Principles to document activities with the Accounting Equation (A = L + SE) as the foundation for their books. { Assets (something owned), Liabilities (something owed), Stockholders Equity (net worth in business)}.

Knowledge/Understanding of this equation is essential to your successful completion of the course. Dollar amounts are assigned to the specific accounts with their affect on the account recorded. At the end of a period, the ending balances in the accounts can then be transferred to financial statements (Income Statement, Retained Earnings Statement, Balance Sheet, and Cash Flow Statement) that serve to summarize the period’s activities and the financial status of the company.

To be done correctly, an articulation among the statements must occur. The Income Statement has to be done first. Net Income is then integrated into the Retained Earnings Statement. From the Retained Earnings Statement, the Ending Retained Earnings is then carried to the Balance Sheet. The Cash Account in The Balance Sheet should match the Net Cash Flow in the Cash Flow statement. If not done in this order, the numbers will not have been updated and the statements won’t reflect correct information. It is from these statements, decisions are made about the health of the business.

Quick formulas for financial statements:

Income Statement is Revenue minus Expenses equals Net Income. (R-E=NI)

Retained Earning Statement is Beginning Retained Earnings plus Investments (if any) plus Net

Income (from Income Statement) minus Dividends equals Ending Retained Earnings.(BRE + NI

-D=ERE)

Balance Sheet is Assets equal Liabilities plus Stockholder's Equity (in other words, the

Accounting Equation).(A=L+SE -- Stock plus Ending Retained Earnings from the Retained

Earnings Statement

Once you understand which accounts comprise each classification – assets, liabilities ,

stockholders equity—you will then easily be able to 'plug' accounts and their amounts in these

financial statements.

Access Accounting Coach for additional tutorials of Accounting Videos (Ch. 1)