THE FUNDAMENTAL ACCOUNTING EQUATION Financial Accounting: In an Economic Context Book


You will notice that stockholder’s equity increases with common stock issuance and revenues, and decreases from dividend payouts and expenses. Stockholder’s equity is reported on the balance sheet in the form of contributed capital and retained earnings. is a liability, whether it is a long-term loan or a bill that is due to be paid. The major and often largest value asset of most companies be that company’s machinery, buildings, and property. These are fixed assets that are usually held for many years. Accounts receivableslist the amounts of money owed to the company by its customers for the sale of its products. If you want to learn accounting with a dash of humor and fun, check out our video course.

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What is the giving in exchange for these assets? It is giving you $1,500 worth of capital in the business. When recording transactions, the accounting equation must stay balanced. If you have just started using the software, you may have entered beginning balances for the various accounts that do not balance under the accounting equation. The accounting software should flag this problem when you are entering the beginning balances, and require you to correct the problem. Use the accounting equation to compute the mission financial statement amounts.

This concept supports the expanded accounting equation. It involves recording transactions by debiting one or more accounts and simultaneously crediting one or more accounts. All transactions must include a corresponding and opposite record in two or more accounts. Here are some expanded accounting equation examples that show the equation is always in balance no matter how the formula is used.


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If you are new to the next thing I would read about would be Liabilities. Retain all or some of the profit and use it as reserves, for growth, reinvestment or somewhere else. If a company makes a profit – each year the company has to make one of two choices. Should have a corresponding entry on the credit side. Metro Corporation paid a total of $1,200 for utility bill. Metro Corporation paid a total of $900 for office salaries.

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