brushing-up-on-accounting
2019-07-23T14:28:01.000Z
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:
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) |
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) |
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) |
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.