brushing up on accounting

Tue Jul 23 2019

Found an old accounting book, it's 10 years old. Started reading it to brush up on my old accounting skills.

Written by: Cesar

3 min read

Found an old accounting book, it’s 10 years old. Started reading it to brush up on my old accounting skills. Accounting is the language of business Re-learned the accounting equation:

assets = liabilities + owner's equity

Also learned about 4 reports:

Income Statement
Statement of Owner’s Equity
Balance Sheet
Statement of Cash Flows

Have also been analyzing various transactions and recording them in a transaction log in order to then create the 4 reports.

Sample of transactions:

(1) Received cash from clients for services
(2) Paid creditors on account
(3) Received cash from Jameson as an additional investment
(4) Paid office rent for the month
(5) Charged clients for legal services on account
(6) Purchased office supplies on account
(7) Received cash from clients on account
(8) Received invoice for paralegal services to be paid next month
(9) Paid wages expense
(10) Determined the cost of office supplies on hand
(11) Jameson withdrew cash from business for personal use

From these I then analyze how they affect the accounting equation using the following log: ::: tip Key (+ idicates an increase, - indicates a decrease) :::

assets	liabilites	owner’s equity
cash supplies accounts receivable	accounts payable	Jameson, Capital
+(1)		+(1)
-(2)	-(2)
+(3)		+(3)
-(4)		-(4)
+(5)		+(5)
+(6)	+(6)
+(7) -(7)
	+(8)	-(8)
-(9)		-(9)
-(10)		-(10)
-(11)		-(11)

You may have noticed that the equation always stays balanced. We either increase/decrease an asset and increase/decrease a liability or owner’s equity or we increase and decrease assets or we increase and decrease liabilities and owner’s equity.

Next from this we can prepare an Income Statement:

fees earned		a
operating expenses
b
c
		d (b + c + any other expenses)
net income (used in statement of owner’s equity)		e ( a - d)

::: tip Key a is fees earned, b,c… are expenses, d is the total expenses, and e is a-d :::

Statement of Owner’s Equity:

capital		a
additional investments	b
net income (from income statement)	c
less withdrawals	d
increase/decrease in owner’s capital		e (b + c - d)
owner’s capital (used in balance sheet)		f (a + e)

::: tip Key if e is negative you have a decrease in owner’s equity :::

Balance Sheet:

assets		liabilities
cash (used in statement of cash flows)	a	accounts payable	f
supplies	b	owners’ equity
accounts receivable	c	capital (comes from statemet of owner’s equity)	g
land	d
total assets	e (a + b + c + d)	total liabilites and owner’s equity	h (f + g)
::: tip Key
e should equal h (assets = liablities + owner’s equity)
:::

Statement of Cash Flows:

cash flows from operating activities:
cash received from customers	a
deduct cash payments for expenses and payments to creditors	b
net cash flow from operating activities		c (a - b)
cash flows from investing activities
cash payments for aquisition		d
cash flows from financing activities
cash received as owner’s investment	e
deduct cash withdrawal by owner	f
net cash flow from financing activities		g (e - f)
net cash flow and cash balance (comes from balance sheet)		h (c - d + g)

Also learned one way to see how robust a company will be if in the coming months there are net losses, can use ratio of liablilites to owner’s equity:

ratio of liabilities to owner's equity = total liablities/ total owner's equity ( or total of stockholder's equity)

It is good to have a small number smaller than 1, if 1 or greater company could be in trouble if many net losses are in its near future.