This means that assets are either derived from liabilities or equity transactions
This equation could be broken down to:
Assets = Liabilities + Common Stock + Retained Earnings
Assets = Liabilities + Common Stock + Revenue – Expenses
To understand accrual understanding, you must understand the terms: Recognition: the formal recognition of an event in the financial statements Realization: refers to the actual collection of benefits (usually cash) from an event. Realization: refers to the actual collection of benefits (usually cash) from an event.
Cash flow does not always match with recognition.
For example
Joe Inc. provides services to customers in 2013 but collects cash for those services in 2014
Under the cash basis accounting method when does Joe recognize his revenue?
2014 – when he collects the cash
Under the accrual basis accounting method when does Joe recognize his revenue?
2013 – in the period the event happened regardless of when cash is collected
Objectives of Lesson 3
Last unit our examples were focused on learning the effect of transactions on the accounting equation using cash accounting i.e. where cash exchanged hands with each transactions. In this unit, we will see how accrual accounting affects the accounting equation.
We will also go through each step in the accounting cycle with examples
The first step of the accounting cycle is to record transactions as they occur. Recording transactions occur every day in a business and is mostly done with a computer. For example when you go to a grocery store and your sales is rung up, you data is automatically recorded in the grocery’s store accounting system.
There are various types of transactions that happen daily in most businesses such as:
1) Acquiring cash in exchange of equity (common stock)
The accounting equation
