MBA Fundamentals Accounting and Finance (Kaplan Test Prep)

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the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.

Economic Entity: The accounting for an entity (i.e., a business) should be kept separate from the accounting for the owners of that entity. This assumption establishes the idea that economic resources and obligations shown on the balance sheet should not be confused with the resources and obligations of the owners of the entity. Owner’s assets shou

understanding that transactions are analyzed and then recorded in a journal (journalized). A journal is used once the accountant or bookkeeper has examined a source document (such as an invoice, a contract, a loan agreement, a calculation, etc.). Journalizing is the recording of the details of all of these source documents into multicolumn journals

For liabilities, assume only two accounts: notes payable for dollars borrowed by the firm and accounts payable for amounts owed to suppliers.

A transaction is an exchange between a business (or some other type of organization such as a nonprofit firm) and one or more external parties, or it is a measurable internal event such as certain adjustments for the use of assets in operations. Transactions have an economic impact on an organization; they have some impact on the accounting formula

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

Assets are a company’s resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill.

Liabilities can be viewed in two ways: 1. Claims by creditors against the company’s assets 2. Source of funds—along with owner or stockholder equity—of the company’s assets

Credits, which are always entered on the right-hand side of an account, are a component of an accounting transaction that will increase liabilities and equity and decrease assets.