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The Accounting Equation
Transcript of The Accounting Equation
All valuable items a company owns
... reflected by the
Total assets must equal
total liabilities and
Brief Definition of
DEBT = amount, sum of
money a company
owes to third parties -> CREDITORS
Equity ... or Net Worth of the Company
- the stake or interest the owners have in
the company, be that a: ...
Corporation -> Stockholder's Equity
Resources with economic value value that a corporation, individual or country owns with the expectation that they will provide future BENEFIT and generate CASH FLOW
ASSETS can be either...
Cash & Cash Equivalents
Balance in company's checking accounts + highly liquid short-term and/or temporary investment (i.e. marketable securities)
Cash and Cash Equivalents might include:...
cetificates of deposit
corporate / government bonds
Accounts Receivable + Notes Receivable
AR, or rather, sum of money owed by customers to whom goods or services were sold on credit
Notes Receivable = Promisory Notes
- receivables a company should collect within a fiscal year
deducting the provisions and accruals obviously
Value of products the retail or wholesale company has bought and intends to resell for PROFIT
Tangible Fixed Assets
Land, buildings, machinery, equipment
shown on balance sheet at the cost the company paid to purchase or build them (including installation costs, additional expenses and taxes
- annual deduction applied to obsolete equipment; applicable to tangible assets exclusively
- the original monetary
value of an economic item
Intangible Fixed Assets
can be either:...
-> amounts a company owes to creditors (usually suppliers' bills: utilities, rent, etc.)
=debt due in more than a year (mortgage, bank loans, bonds, etc.
EQUITY is what the company is worth to its owners or ...
-> an ownership claim on a portion of the company's assets at a fixed price/share (par value)
Capital in excess of par value
-> stock sold at a higher price than par value per share is accounted for separately on the balance sheet
-> the profit which the company's management re-invested into the business on a year-over-year basis
Current Assets = active curente sau circulante
Fixed Assets = active imobilizate
Imobilizari corporale - cladiri, terenuri, echipamente
Imobilizari necorporale - licente, patente, drepturi de
Imobilizari financiare - actiuni a alte firme, actiuni
la bursa, etc.
Liabilities = datorii
Current Liabilities - datorii curente
= datorii pe termen scurt < 1 an
Fixed Liabilities - datorii pe termen
lung > 1 an
= capital social + rezerve (profit nerepartizat)
Retained earnings - profit nerepartizat
Q & A
To explain the basic Accounting Equation and its use in a fiscal entity financial accounting
Identify and explain each Accounting Equation term in relation to the Balance Sheet and to each other
Amortisation - unlike tangible fixed assets, intangible ones are amortised progressively, meaning that the value deducted is basically accounted for like an investment producing future revenue gradually
Impairment - also applicable to intangible
assets and recorded as a one-time deduction
applied to the market value of an item