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AccountingCollege3 topic explainers

Financial Accounting course

Recording transactions and reading financial statements.

Topics in this course

  1. 1.The Accounting Equation

    Every business transaction is recorded against one identity: Assets = Liabilities + Equity. Assets are what the business owns or controls, such as cash, inventory and equipment. Liabilities are what it owes to outsiders, such as loans and unpaid bills. Equity is the owners' claim on what is left.

    • Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity} after every transaction.
    • Revenue increases equity; expenses and owner withdrawals decrease it.
    • Debits increase assets and expenses; credits increase liabilities, equity and revenue.
    Quick check: Assets $120,000 and equity $75,000. Liabilities?

    $45,000

    Includes a worked example, 3 common mistakes and 3 practice questions with answers. Study the accounting equation

  2. 2.Financial Statements

    Three statements summarise a company's finances. The income statement shows revenue minus expenses over a period, ending in net income. The balance sheet is a snapshot of assets, liabilities and equity at one moment. The cash flow statement tracks actual cash moving in and out from operating, investing and financing activities.

    • Net income == revenue −- expenses.
    • Gross profit == revenue −- cost of goods sold; margin =profitrevenue= \frac{\text{profit}}{\text{revenue}}.
    • Ending retained earnings == beginning ++ net income −- dividends.
    Quick check: Current assets $60,000, current liabilities $40,000. Current ratio?

    1.51.5

    Includes a worked example, 3 common mistakes and 3 practice questions with answers. Study financial statements

  3. 3.Depreciation

    Long-lived assets such as machines, vehicles and computers wear out or become obsolete. Depreciation spreads an asset's cost over its useful life, so each year's income statement carries a fair share of the cost rather than all of it in the year of purchase. Land is not depreciated.

    • Straight-line: cost−salvageuseful life\frac{\text{cost} - \text{salvage}}{\text{useful life}} per year.
    • Double-declining balance: 2life×\frac{2}{\text{life}} \times beginning book value.
    • Book value == cost −- accumulated depreciation.
    Quick check: Straight-line depreciation: cost $12,000, salvage $2,000, life 4 years.

    $2,500

    Includes a worked example, 3 common mistakes and 3 practice questions with answers. Study depreciation

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