Understanding the Balance Sheet

A balance sheet is a formal statement showing the financial position of an entity as of a particular date. The balance sheet is the only financial statement that reports as of a particular date compare to income statement, statement of changes in equity, and cash flows which all reports for a particular period of time. The balance sheet presents the three elements of financial position, namely assets, liabilities and equity.

Assets are defined as resources controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the company. In layman’s language these are the properties owned by the entity. Read more

What is basic accounting?

According to American Institute of Certified Public Accountants (AICPA), accounting is “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”

Basically, accounting is the process of identifying, measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it.

From the definition above, there are three important activities in the accounting process, namely identifying, measuring and communicating. Read more

Understanding income and the difference between a revenue and a gain

What is income?

Income is defined as “increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution from equity participants”.

Simply stated, income is an inflow of future economic benefit that increases equity, other than those that are contributed by owners. It specifically increases retained earnings in the equity section of the balance sheet.

Income is derived from the following activities: Read more

What is the difference between a cost and an expense?

So what’s indeed the difference between the two income statement accounts? Before we try to answer that question, we will first try to discover why this question existed anyway? Actually, we try to differentiate two things when they seem to be they same and we can’t figure out their differences. So what are their similarities? Cost and expense both sounds unfavorable elements of income statement since they both cause a decrease to net profit. In the accounting equation, the two are also naturally debit accounts (meaning they increase when debited and decrease when credited). Cost and expenses also cause an outlay in cash or an increase in liability when obtained. For example, a purchase of equipment causes cash outlay when purchased on cash payment and causes an increase in liability when purchased on account. The following is a list of some similarities between a cost and an expense. Read more

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