CHAPTER 2

THE VALUE OF THE COMPANY: OWNERS´ EQUITY

Assets−Liabilities=Owners ´ equity
Owners´ equity is the amount of an entity´s assets that remain after its liabilities are
subtracted
The purpose of a business is to increase owners´ equity
THE ACCOUNTING ECUATION
The accounting equation presents the resources of the business and the claims of
those resources
E conomic Resources=Claims ¿ Economic Resources
Assets=Liabilities+ Owners´ Equity
Assets: economic resources of a business that are expected to be of benefit in the
future
Claims to assets come from
 Liabilities: economic obligations – debts payable to outsiders, called creditors
 Owners´ equity (capital): assets held by the owners of the business
For a corporation, stockholders´ (owners´) equity consists of two main categories
Assets=Liabilities+ Stockholders ´ Equity
Assets=Liabilities+ Paid ∈Capital+ Retained Earnings
 Paid-in capital
o The amount invested in the corporation by its owners
o Comprises basically of common stock
 Retained earnings
o Is the amount earned by income-producing activities and kept for use in
the business
o Is affected by
 Revenues: increases in retained earnings from delivering goods
or services
 Expenses: decreases in retained earnings that result from
operations

Net income (net earnings): total revenues exceed total expenses

Net loss: total expenses exceed total revenues
Dividends: distributions to stockholders (usually cash) generated by net income
ACCOUNTING EQUATION ELEMENTS (PGC)
Assets: goods, rights and other resources controlled by the company as a result of past
events and from which future economic benefits are expected to flow to the company
 Liabilities: present obligations of the company arising from past events, the settlement
of which is expected to result in an outflow of resources from the company embodying
future economic benefits. Liabilities shall include provisions.

Equity: the residual interest in the assets of the company after deducting all its
liabilities. Equity includes contributions made by equity holders or owners upon
incorporation of the company or subsequently that are not considered as liabilities, as
well as retained earnings and cumulative losses or other related variations
LONG TERM ASSETS OWNER´S EQUITY
Those assets which the company expects to hold Represents the shareholders´ ownership of the
longer than the next 12 months or the business´s assets of the business
normal operating cycle if longer than one year  Common stock (capital)
 Tangible assets: property, plant, equipment…  Retained earnings (reserves)
 Intangible assets: patents, trademarks  profits
 Long-term investment
CURRENT ASSETS LONG-TERM LIABILITIES
Those assets which the company expects to convert Debts not payable within one year or withing the
to cash, sell, or consume during the next 12 months business´s normal operating cycle if longer than a
or within the business´s normal operating cycle if year
longer than a year  Notes payable
 Cash  Bonds payable
 Accounts receivable
 Merchandise inventory
 Prepaid expenses
 Short-term investment
CURRENT LIABILITIES
Debts payable within one year or within the business
´s normal operating cycle if longer than a year
 Notes payable
 Accounts payable
 Accrued expenses payable
 Income taxes payable
ACCOUNTING TERMS
TRANSACTIONS THAT AFFECT OWNERS´ EQUITY