The 3 Principal Financial Statements

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The 3 Principal Financial Statements

I.The balance Sheet

Snapshot of the financial condition of a firm - Measured on a given date ASSETS = LIABILITIES + EQUITY
Assets : What you have - INVESTING - USES
Liabilities : What you owe - FINANCING – SOURCES


An asset is a resource that has a potential future economic (i.e. generate future cash inflows or reduce future cash outflows). •An asset is recognized when:
It is acquired in a past transaction or exchange
The value of its future benefits can be measured with a reasonable degree of precision •All assets are future benefits but not all future benefits are recognized as assets.


A liability is a claim on assets by “creditors” (non-owners) that represents an obligation to make future payment of cash, goods, or services

A liability is recognized when:
The obligation is based on benefits or services received currently or in the past The amount and timing of payment is reasonably certain

All liabilities are obligations but not all obligations are recognized as liabilities.


Shareholders’ equity - residual interest in the firm
Types of Shareholders’ Equity:
Contributed Capital – Cash contributed to the firm by owners - investors Retained Earnings – Cumulative earnings/profits of the firm that haven’t been paid out as dividends

1)Retained Earnings

Net accumulation of earnings of the firm since its beginning •Increased by net income and reduced by losses, and by the payment of dividends to the shareholders or owners •For any accounting period:


2)Recording Transactions

General Rules: Debits increase the balance in Asset and Expense accounts and credits increase the balance in Liability, Contributed Capital, and Revenue accounts •Super T-account :

II.The Income Statement

How profitable is the firm? - Measured over a period of time. NET INCOME = REVENUES – EXPENSES
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