1. The Financial Statements
- Profit & Loss: What you’re earning.
- The Income Statement: Connects to the Balance Sheet via an account called Retained Earnings.
- Balance Sheet: What you own vs owe. The Balance Sheet is shown at a specific time (so the balances are cumulative).
- Cash Flows: Where your cash is going. The Cash Flows Statement: net income from the Income Statement, and differences in almost all accounts on the Balance Sheet.
2. Assets = Liabilities + Owners Equity
- Asset: Economic value.
- Liabilities: Amounts owed to creditors (capped).
- Equity: Amounts owed to owners (uncapped).
- What you OWN was funded by what you OWE to CREDITORS and OWNERS.
3. Debits & Credits
- Describes increases or decreases with accounts.
- Assets: ↑ Debit, ⇓ Credit.
- Liabilities + Owners Equity: ⇓Debit, ↑ Credit.
- Income accounts: ⇓Debit, ↑ Credit.
- Expense accounts: ↑ Debit, ⇓ Credit.
4. Cash vs Accrual
- Cash Basis: Only cares about cash coming in vs going out.
- Accrual Basis: Only cares about income earned or expenses incurred.
- Cash Basis is more common for smaller companies.
- Accrual 1 Basis is more common for larger companies and is required by ASs.
