An Introduction to Accounting Equation

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Assets and Liabilities
The financial statements are based on the accounting equation. This equation presents the resources of a company and the claims to those resources. Assets are economic resources that are expected to produce a benefit in the Future Liabilities are outsider claims. They are debts that are payable to outsiders, called creditors. Owners' equity (also called capital or stockholders equity for a corporation) represents the insider claims of a business. The accounting equation shows the relationship among assets, liabilities, and owners' equity. Assets appear on the left side and liabilities and owners' equity on the right. The owners' equity of any business is its assets minus its liabilities. We can write the accounting equation to show that owners' equity is what's left over when we subtract liabilities from assets. Assets - Liabilities = Owners Equity A corporation's equity called stockholders equity has two main subparts: The accounting equation can be written as

Assets = Liabilities + Stockholders Equity Assets = Liabilities + Paid-in Capital + Retained Earnings Paid-in capital is the amount the stockholders have invested in the corporation. The basic component of paid-in capital is common stock, which the corporation issues to the stockholders as evidence of their ownership. All corporations have common stock. Retained earnings are the amount earned by income-producing activities and kept for use in the business. Three major types of transactions affect retained earnings: revenues, expenses, and dividends. Revenues are inflows of resources that increase retained earnings by delivering goods or services to customers. Expenses are resource outflows that decrease retained earnings due to operations. Expenses represent the costs of doing business; they are the opposite of revenues. Expenses include cost...
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