Making Sense of Accounting Equations - Part 2 Articles | Accounting

Moreover, retained earnings are greatly influenced by three kinds of transactions, and these are dividends, revenues, and expenses. Revenues are earned when the stock goes up and expenses are incurred when the stock comes down. Revenues and expenses occur due to the running of a business, whatever it may be - whether it is online or offline. In case you have an online business, then the operating expenses that you will incur if you host your own website would be the domain name as well as the hosting service. A further example would be a client in favor of paying you soon for a service to be rendered by the company. In this case, the money is entered in the column under accounts receivable or the asset account, and this brings about a rise in the value of the assets but reduces the equity amount of the stockholders, which is an illustration of revenue. But, if the company pledges to supply a service sometime in the future then this is called as an expense. Now when this takes place, the assets go down (accounts receivable) while the liabilities or the accounts payable go up, and this is quite reasonable isn’t it?

When the revenues are more than the expenses, it is called the net income and this is certainly a good thing. But, when the expenses are more than the revenues, then this is called net loss, and this indicates that you are running an unprofitable business or that your business needs a great deal of money to run than what you actually earn. Next, dividends refer to the asset distribution amongst the stockholders and pertain to past earnings. Now, do not mix up expenses and dividends, since they both lead to a reduction in the amount of retained earnings. Next, retained earnings refer to the amassed net income or the revenues less the expenses. A company’s financial statement is the principal method for conveying information relating to its business to people who have some sort of interest in its running. Now what strikes me is to view these statements as some sort of a model for the business since they reveal how well the business is doing financially.

Nevertheless, similar to a whole host of models and methods, financial statements definitely are not flawless and have their shortcomings. There are 4 chief financial statements, and these are the income statement, the retained earnings statement, the balance sheet, plus finally the cash flow statement. Now the job of the income statement is to sum up the revenues received or the money generated, as well as the expenses, which is subtracted from the business. A majority of the accountants believe it to be the most vital financial report since it brings to light the fact whether the business has attained its profitability goal. Next comes the retained earnings statement and it exhibits the retained earnings made over an extended period of time. Now the time when retained earnings are depicted as zero pertains to when the company first initiated their accounting period.

It is seen that a number of companies tend to make use of the stockholders equity statement in place of the retained earnings statement. This in fact is a more comprehensive statement since it shows apart from the elements of retained earnings, also the changes made in the accounts of the stockholders equity. Then, the financial position of the business as on a specific date, generally at the month end or the year-end, is contained in the balance sheet. Now, the balance sheet shows the value of the business based on its assets as well as the claims made on those very assets, which are called the liabilities together with the stockholders equity. Finally, the cash flow statement reveals the company’s liquidity measures. Now these statements are essentially the cash inflow and the cash outflow of a company. Net cash flow is obtained by making deductions between cash inflows and outflows. The cash flow statement also exhibits the money made just by running the business, and in addition, it also reveals the investments and financial transactions that take place in the course of a specific accounting period.