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The Accounting Equation

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by

Iuliana Naghy

on 29 June 2014

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Transcript of The Accounting Equation

Brief Definition of ASSETS:

All valuable items a company owns

ASSETS
... reflected by the
BALANCE SHEET


Total assets must equal
total liabilities and
owner's equity
Cash
Accounts Receivable
Inventories
Buildings
Brief Definition of
LIABILITIES:

DEBT = amount, sum of
money a company
owes to third parties -> CREDITORS

Equipment
Brief Definition:
Equity ... or Net Worth of the Company

- the stake or interest the owners have in
the company, be that a: ...
Corporation -> Stockholder's Equity
Partnership Equity
Sole Trader
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...
CURRENT
or...
FIXED
CURRENT ASSETS
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
stocks
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
Merchandise/Inventory/Stock
Value of products the retail or wholesale company has bought and intends to resell for PROFIT
FIXED ASSETS
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
Please consider...
Depreciation
- annual deduction applied to obsolete equipment; applicable to tangible assets exclusively
Historical Cost
- the original monetary
value of an economic item
Intangible Fixed Assets
Patents
Copyrights
LIABILITIES
can be either:...
CURRENT
Accounts Payable
-> amounts a company owes to creditors (usually suppliers' bills: utilities, rent, etc.)
Payroll
Income Taxes
LONG-TERM
=debt due in more than a year (mortgage, bank loans, bonds, etc.
EQUITY is what the company is worth to its owners or ...
Common Stock
-> 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
Retained Earnings
-> the profit which the company's management re-invested into the business on a year-over-year basis
Basic Reminder
Assets
= active
Current Assets = active curente sau circulante
Fixed Assets = active imobilizate
Imobilizari corporale - cladiri, terenuri, echipamente
Imobilizari necorporale - licente, patente, drepturi de
autor
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
Equity
= capital social + rezerve (profit nerepartizat)
Retained earnings - profit nerepartizat
si reinvestit
Q & A
Presentation Objectives:
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
Please consider...
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
EXERCISE
+
Impairment - also applicable to intangible
assets and recorded as a one-time deduction
applied to the market value of an item
Full transcript