Basic Accounting - The Accounting Equation

 Clay tokens have been 7000 years old. They also had clay tablets.

Double Entry Bookkeeping: originated in Venice Italy. The list of assets and where it comes from.

So,

Assets: Economic resources owned or controlled by a company that will provide future benefit, ex: cash, inventories, buildings, and equipment.

There are two ways to fund assets:

1.      Liabilities: obligations satisfied through payments or services to someone else we owe money to.

2.      Owner’s Equity: investments in company and retained profits.

With these three categories we can look at the resources vs claims:

$ Assets=Liabilites+Equity $

There are three main statements:

1.      Balance Sheet: Assets, liabilities, and Equity.

2.      Income Statement: a detailed look at owner’s equity.

3.      Statement of Cash Flows: Cash inflows and outflows over time.

There are three cash flow categories:

1.      Operations: This is talking about cash revenue and expenses.

2.      Investments: Purchasing equipment, tech, or business deals; and the divestment of these assets.

3.      Financing: Money received through loans or paid in capital or the interest and dividends paid.

The Expanded Accounting Equation is as follows:

$ Cash+Other Assets=Liabilities+Paid In Capital+Stock+Retained Earnings $

Here we can derive the current period’s retained Earnings and Cash through the following: 

  1. $ Cash_t=Cash_{t-1}+Inflows-Outflows $
  2. $ Retained Earnings_t=Retained Earnings_{t-1}+Revenue-Expenses-Dividends $

Which means the larger equations is:

$ Cash_{t-1}+Inflows-Outflows+Other Assets=Liabilities+Paid In Capital+Stock+Retained Earnings_{t-1}+Revenue-Expenses-Dividends $

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