MBA Fundamentals Accounting and Finance (Kaplan Test Prep)

Now move from an individual to a business. Same concepts, different language: • What the company owns is called its assets. • What it owes is called its liabilities. • What it’s worth is called owners’ equity or shareholders’ equity. And the basic equation now looks like this: or this:

These abstract concepts were expressed with new bookkeeping techniques: accounts had two sections, debit and credit, and each transaction was therefore entered twice, once on the debit side, once on the credit; ample cross references connected different customer or commodity accounts; a final financial result was summed out of the combined income;

Accrual accounting is more complex, but it provides a clear snapshot of a company’s financial status at any given time by accommodating the frequent lag between when a purchase is made and when money changes hands. Every transaction is recorded in two places in a general ledger; a debit or credit entry in one account is offset by a credit or debit

If a business owner invests capital into a business, which in almost all cases happens when it is being launched, then that capital will show up, under owner’s equity, as an equity investment. Here’s where you see the $30,000 in start-up money that you saved (and borrowed from your parents), and the $5,000 from your husband. These infusions of cash