MBA Fundamentals Accounting and Finance (Kaplan Test Prep)

When you examine the balance sheet of a corporation, many of the accounts are really a summation or aggregation of several accounts. For example, accounts receivable (money owed to the business by customers who have purchased on credit) shown on a balance sheet could be comprised of hundreds of subsidiary accounts of all the company’s customers.

For simplicity’s sake, assume just one equity account, where we will record sales and expenses:

Because there are two or more accounts affected by every transaction, the accounting system is referred to as double-entry accounting.

Liabilities are a company’s obligations—amounts the company owes (including debts like amounts owed to vendors and bank loans). Examples of liabilities include notes payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable.

Assets = Liabilities + Stockholders’ Equity

It is a chronological record of the transactions of a business. However, the journal should not be confused with the ledger—the collection of accounts used by the firm and the real heart of the accounting system.

Stockholders’ equity is the amount left over After liabilities are deducted from assets: Assets - Liabilities = Stockholders’ Equity Owner’s or stockholders’ equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.

To perform transaction analysis, two important rules need to be followed: 1. Every transaction affects at least two accounts. 2. The accounting equation must remain in balance after each transaction. In other words, this equilibrium must always be in place (both before and after the transaction’s effects have been recorded): Assets = Liabilities +

Assets (what it owns)· • Liabilities (what it owes to others)· • Owner’s equity (the difference between assets and liabilities)