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# 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

## 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

## -\$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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