Today, with the young folks, we will quickly learn the accounting equation. One of them is familiar with the concept but the others are totally clueless. In fact, they may not be interested at all but that is no excuse not to know the bare minimum. This will be a literally twenty minute lesson.
First ten minutes will be the accounting equation itself with examples. The second ten minutes with be the financial statement. I do not expect them to know it well after this but they will hear me ask questions about it until I feel like it has settled into the brain.
Assets = Liabilities + Owner’s Equity or (Stockholder’s equity)
Asset Accounts
- Have a normal debit balance.
- To increase an asset account, you must debit the account.
- Assets are located on the left side of accounting equation.
Liabilities Accounts
- Have a normal credit account.
- To increase a liabilities account, you must credit the account.
- Liability accounts are located on the right side of the accounting equation and on the right side of the T account.
Owner’s Equity Accounts
- Have a normal credit balance, it is located on the right side of the accounting equation.
- To increase the owner’s equity account, you must credit the account.
- In place of owner’s equity can be stockholder’s equity which is the retained earnings account.
Financial Statements
Balance Sheet
- Shows the financial position of a company at a certain time.
- Assets, liabilities and equity (owner’s equity or stockholder’s equity) are contained in the balance sheet.
- Helps to determine the financial strength of a company.
Income Statement
- Contains the financial transactions of a company at a certain time period.
- Revenues, expenses, profit/loss.
- It shows the companies profitability.
Statement of Cash Flow
- It shows the inflow and outflow of cash.
- Looks at cash flow from operating, investing and financing .
- Establishes where cash is being generated or used within the business.