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Components of Financial Statements

Components of Financial Statements

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Published by: naimdelhi on Jul 22, 2010
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Components of Financial Statements
 Assets, Liabilities, Owner's Equity, Revenues, Expenses, Gains, Losses Financial Statements Overview
 
Accounting Equation
 
Assets = Liabilities + Equity
Equity = Assets - Liabilities ---> Assets = Liabilities + Equity
 [Example]
 Company A has $800,000 liabilities and $1,200,000 equity.How much assets does the Company A have?Assets = Liabilities + Equity = $800,000 - $1,200,000 = $2,000,000Assets = Liabilities + EquityLiabilities = Assets - EquityEquity = Assets - LiabilitiesFrom any balance sheet,--> it can be verified that-->Total Assets = Total Liabilities + Total Stockholders' Equity. 
Assets
 Assets are--> probable future economic benefits--> obtained or controlled by an entity--> as a result of past transactions or events.[SFAC No. 6., Para. 25]Essential characteristics of assetsProbable future economics benefitsObtained or controlled by an entityResult of past transactions or events.Common characteristic of all assets--> is service potential or future economic benefits[SFAC No. 6., Para. 28]
Liabilities
 Liabilities are--> probable future sacrifices of economic benefits--> arising from present obligations of an entity--> to transfer assets or provide services to other entities in the future--> as a result of past transactions or events. [SFAC No. 6., Para. 35]Essential characteristics of liabilitiesProbable future sacrifices of economic benefitsPresent obligations to transfer assets or provide services in the futureResult of past transactions or events. 
Equity
 Equity (or net assets) is--> residual interests in the assets of an entity--> that remains after deducting its liabilities. [SFAC No. 6., Para. 49]Essential characteristics of equityEquity is
residual
interests in the assets after deducting liabilitiesEquity = Assets - Liabilities 
[Example]
 Company A has $2,000,000 assets and $800,000 liabilities.How much equity does the Company A have?Equity = Assets - Liabilities= $2,000,000 - $800,000 = $1,200,000 
Revenues
 
 Revenues are--> inflows of assets of an entity or--> settlements of its liabilities (or a combination of both)--> from delivering or producing goods, rendering services. [SFAC No. 6., Para. 78]Essential characteristics of revenuesInflows of assets or settlements of liabilitiesFrom delivering goods or rendering services 
Expenses
 Expenses are--> outflows or other using up of assets or--> incurrences of liabilities (or a combination of both) |--> from delivering or producing goods, rendering services. [SFAC No. 6., Para. 80]Essential characteristics of expensesOutflows of assets or incurrences of liabilitiesfrom delivering goods or rendering services 
Gains
 Gains are--> increases in equity (net assets)--> except those from revenues or investments by owners.[SFAC No. 6., Para. 82]Essential characteristics of gainsIncreases in equity from transactions or eventsExcept those that result from revenues or investments by owners. 
Losses
 Losses are--> decreases in equity (net assets)--> except those from expenses or distributions to owners.[SFAC No. 6., Para. 83]Essential characteristics of lossesDecreases in equity from transactions or eventsExcept those that result from expenses or distributions to owners. 
Net Income and Owner's Equity 
Assets = Liabilities + EquityAssets = Liabilities + Equity + Revenues - ExpensesAssets = Liabilities + Equity + Revenues - Expenses + Gains - Losses Ending Assets = Ending Liabilities + Ending Owner's Equity Ending Owner's Equity= Beginning Owner's Equity + Investment by Owner + Net Income 
Net Income = Revenues - Expenses + Gains - Losses
 Ending Owner's Equity= Beginning Owner's Equity + Investment by Owner+ Revenues - Expenses + Gains - LossesEnding Assets= Ending Liabilities + Ending Owner's Equity= Ending Liabilities + Beginning Owner's Equity+ Investment by Owner +Net Income= Ending Liabilities + Beginning Owner's Equity+ Investment by Owner +Revenues - Expenses + Gains - LossesIf Investment by Owner = 0, Gains = 0, Losses = 0, thenEnding Assets = Ending Liabilities +Beginning Owner's Equity+ Revenues - ExpensesEnding Assets = Ending Liabilities +Ending Owner's EquityAssets = Liabilities + Owner's Equity
 
 
Assets
are reported on the
balance sheet
.Asset accounts have normal balances on the
debit
side.Increase in assets is reported on the
debit
side of a journal entry.Decrease in assets is reported on the
credit
 side of a journal entry. 
Liabilities
are reported on the
balance sheet
.Liability accounts have normal balances on the
credit
side.Increase in liabilities is reported on the
credit
side of a journal entry.Decrease in liabilities is reported on the
debit
side of a journal entry. 
Owner's Equity
is reported on the
balance sheet
.Owner's equity accounts have normal balances on the
credit
side.Increase in owner's equity is reported on the
credit
side of a journal entry.Decrease in owner's equity is reported on the
debit
side of a journal entry. 
Revenues
are reported on the
income statement
.Revenue accounts have normal balances on the
credit
side.Increase in revenues is reported on the
credit
side of a journal entry.Decrease in revenues is reported on the
debit
side of a journal entry. 
Expenses
are reported on the
income statement
.Expense accounts have normal balances on the
debit
side.Increase in expenses is reported on the
debit
side of a journal entry.Decrease in expenses is reported on the
credit
 side of a journal entry. 
Gains
are reported on the
income statement
.Gain accounts have normal balances on the
credit
side.Increase in gains is reported on the
credit
side of a journal entry.Decrease in gains is reported on the
debit
side of a journal entry. 
Losses
are reported on the
income statement
.Loss accounts have normal balances on the
debit
side.Increase in losses is reported on the
debit
side of a journal entry.Decrease in losses is reported on the
credit
 side of a journal entry. 
An Example of Detailed Balance SheetSample Technology CorporationBalance SheetDecember 31, 2006
 
Assets
 
Current Assets
 
Cash
 
Marketable Securities
 
Accounts and Notes Receivable
 
Less: Allowance for Doubtful Accounts
 
Inventories
 
Other Current Assets
 
Total Current Assets
 
Investments
 
Long-Term Investments in Bonds
 

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