Hello everyone, welcome to Week 2 in your accounting journey. This week we're going to be talking about the fundamental accounting equation and taking a look at financial statements. Let's take a look at the learning objectives. First, we're going to analyze the fundamental accounting equation. Next, we'll define the meaning of assets, liabilities, equity, revenue, and expenses. Then we will identify asset, liability, equity, revenue, and expense accounts, and then we will finish up with taking a look at the basic financial statements. What is the fundamental accounting equation? We'll break it down into three pieces. First, property equals financial interests. Second, property can be looked at as assets. So assets equals the financial interest of creditors and owners. Finally, we'll get to the fundamental accounting equation. Assets equals liabilities plus equity. Let's take a look at some definitions. What is an asset? An asset is what the company owns. For example, cash, accounts receivable, prepaid rent, inventory, and equipment. What is a liability? A liability is what the company owes, its debts or obligations. For example, accounts payable, notes payable, and unearned revenue. What is equity? Equity is the owners' financial interest in the company. It includes common stock as well as retained earnings. Some of these terms will probably be new to you. What we just talked about with regards to examples for assets, liabilities, and equity and we will get to answering those questions in the next week or so. What is revenue? Revenue increases equity. Revenue is income that a business earns, for example, service revenue for a company that is a service company, performing services for a customer, or revenue can be in terms of sales, selling a product to a customer. What is an expense? Expenses decrease equity. An expense is a cost of operation that a company incurs to earn revenue. For example, rent expense, advertising expense, and salaries and wages expense. Now let's move over to the four financial statements. First is the income statement. This shows operations for a period of time, whether it's for a month, a quarter, or a year. Next, we have the retained earnings statement. This is also for a period of time, whether it's a month, a quarter, or a year. Then third, we have the balance sheet. This is as of a specific date in time. Then finally, our fourth financial statement is the statement of cash flows, which is for a period of time as well. Statement of cash flows is not going to be discussed in this class as it's a little bit more complex. Let's take a look at a sample income statement. Revenue minus expenses equals net income or net loss, if revenues exceed expenses, there's net income. Take a look at a sample income statement. Notice the proper title. The title answers the questions, who, what, and when. Who is the name of the company. What is the name of the statement, and when is whether it's a date in time or for a period in time. For this example, it's for the month ended November 30th, 2022. Let's take a look. Revenue, got service revenue of $10,000, then we have expenses. We have rent expense, salaries expense, and telephone expense. Then we see our total expenses of $3,750. So we take our revenue of 10,000, subtract out the total expenses and then we get net income of 6,250. Keep that number in mind because it's going to flow to the next statement. The retained earnings statement. Retained earnings is the amount of net income leftover for a business after it is paid out dividends to its shareholders. Notice we have a proper title, the who, what, and when, and then our retained earnings statement, we have our beginning retained earnings as of November 1st, this shows that it's zero. We're assuming that the company just started operations November 1st. We're going to add in net income. Recall this $6,250 came from the net income from the income statement. Then we'll subtract out dividends of $750. Then we have ending retained earnings as of November 30th for $5,500. Keep note of that number because that will follow into our next statement, the balance sheet. The balance sheet equation is assets equals liabilities plus equity. Notice that is our fundamental accounting equation. For the balance sheet, we also have our proper title, who, what, when. But for the balance sheet, the date is as if a particular date in time, November 30th, 2022, versus the income statement and retained earnings statement, was for a period of time. The balance sheet. So on the left-hand side, we have assets, we have cash, accounts receivable, supplies, prepaid rent, and equipment. Then we have our total assets of $24,000. Assets are listed in what we call order of liquidity. Order of liquidity means the ease of converting to cash, so cash is always first. Then on the right-hand side of the balance sheet we have our liabilities and stockholders equity. We have two liabilities, accounts payable and unearned revenue for total liabilities of 7,500. Then in stockholders equity we have common stock of 11,000 and retained earnings of 5,500. Remember, I'm going to pop back to the statement of retained earnings. Notice our ending retained earnings, $5,500, flowed right into the balance sheet where we have retained earnings of $5,500. We will total up our stockholders' equity from the common stock and retained earnings for 16,500. We will total our liabilities and our stockholders' equity, and it is $24,000, which exactly ties out to our total assets so we are in balance. Thank you so much for joining me for this second week of our class and I look forward to talking about analyzing transactions in the accounting cycle next week. Stay tuned.
