Accounting 101

4 basic Accounting Formulas

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1: Balance Sheet = List of Things

Assets = Liabilities + Equity o Foundation of Balance Sheet o Reports a firms financial position o Measured at a point in time o Left side = All resources you control o Right side = where you got those resources

o Assets
Resources controlled by the firm 3 kinds Cash Account Receivables What people owe but have not paid yet Inventory (stocks)

o Liabilities
Current obligations of the firm 2 kinds Accounts Payable What we owe people but have not paid yet Utility Payable Liabilities = Assets Equity

o Equity
Residual claim owners have on assets of the firm Equity = Assets - Liability Net Assets Net = Something minus something

Assets Cash $12,000 Acc/Rec Inventory

Liabilities Acc/Pay Util/Pay

Equity MF, Cap $12,000

$4,500 -$600 $4000 -$2200 -$4,500 $2000 -$1000 $7,900 $2,000 $2,300 -$2000

$4,500 -$600 $4000 -$2200 -$4,500 $100 $0 $100 -$100 -$1000 $12,100

$12,000 investment in new business $4,500 inventory credit $600 shop rent $4000 sale on credit o $2200 worth of inventory -$4500 Payment of Account Payables +$2000 cash from collection of account receivable -$100 pays electricity -$1000 withdraws cash to party

Assets = Liabilities + Equity $7900 + $2000 + $2300 = $0 + $100 + $12,100 Sample Balance Sheet: Assets Cash Accounts Receivable Inventory $7900 $2000 $2300 Liabilities and Equity Accounts Payable Utilities Payable Total Liabilities MF, Capital Total Equity Total Assets $12,200 Total Liabilities and Equity $0 $100 $100 $12,100 $12,100 $12,200

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2: Income Statement = List of Events

Revenues = Expenses + Net Income
o Foundation of Income Statement o Reports the Firms Results of Operations o Transaction of Firm other than owners With people/customers With labor With suppliers With the government o Measured over a period of time

Revenues
o Birth of new assets from providing goods and services to customers

Expenses
o Deaths of assets sacrificed to secure revenues o Expenses = Revenues Net Income

Net Income
o Change in Equity derived from transactions with Customers o Net income = Revenues Expenses

Assets Cash $12,000 $4,500 -$600 $4000 -$2200 -$4,500 $2000 -$1000 $7,900 $2,000 $2,300 -$2000 Acc/Rec Inventory

Liabilities Acc/Pay $4,500 Util/Pay

Equity MF, Cap $12,000 -$600 $4000 -$2200

-$4,500 $100 $0 $100 -$100 -$1000 $12,100

$12,000 investment in new business $4,500 inventory credit $600 shop rent $4000 sale on credit o $2200 worth of inventory -$4500 Payment of Account Payables +$2000 cash from collection of account receivable -$100 pays electricity -$1000 withdraws cash to party

Sample Income Statement:

Sales Cost of Goods Sold Gross Margin Operating Expenses: Rent Expense Utilities Expense Total Operating Expense Net Income $600 $100 $700 $1100 $4000 $2200 $1800

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Statement of Owners Equity 3: Beginning + Ads = Endings + Deducts

o Foundation for the Statement of Owners Equity o Reports a firms changes in equity (or any other balance sheet element) o Measured over a period of time Beginning 38 Total Available = 100 Ending 27 Deductions 73 Additions 62

Sample statement of owners equity:

Beginning Balance Additions: New Investment by owner Net Income Total Additions Deductions: Withdrawal by owner Net Loss Total Deductions Ending Balance $12,000 $1100 $13,100 $1000 $0 $1000 $12,100 $0

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