The Background
Ever since I was in High School, I had made a deliberate attempt not to go close to Accounting.
I have always thought I would be a doctor so when I was going to pick my SS1 class, science class was the only option I thought of. I think I did quite well until chemistry started becoming very abstract. I related more to physics than chemistry.
I later decided that maybe science class was not my thing. Then, there were four options to pick from and we were about to go into SS2, so I thought of my next best option. The options were Science class, Art Class, Commercial Class, and Social Sciences. Art class was a no for me because literature was a core requirement and I hated to read books (covering my eyes). As for the commercial class, the fear of account was the beginning of wisdom for me – at least so I thought. I ditched account class in secondary school for social sciences. I love Economics and Accounting.
Studying Economics at the University did not also prepare me for anything I have encountered in Accounting in the past 3months with CFA. The past 3months have been a roller coaster ride for me and accounting has been one of the core elements of this.
The Discoveries
Revising my CFA earlier just gave me a little more hope and understanding of what I have always run away from. Since the beginning of this class, I have known that the accounting equation is Asset = Liabilities + Owner’s Equity. Reading today made me understand better.
A balance sheet reports the financial position of a company at a given point in time. The balance sheet reports the company’s financial position through what it owns. The asset of a company is depicted with owner financing and non-owner financing. Both of which have claims to the business. Owner financings are contribution claims referred to as equity while non-financing refers to liability. Both equity and liability are used to finance the business.
The 2 are distinguished by the fact that borrowed money has some legal implications to it, the business will have to repay the money, and failure to do so can result in severe consequences for the business while owners’ financing involves no legal obligations. What the business owes in this case is dividends to pay the shareholders who put in their money.
In other words, Investing (Asset) = Non-Owner Financing (Liability) + Owner Financing (Equity). This explained a lot to me when I read it, so I thought to share.
For the income statement- I revised that the Income statement reports a company’s performance over a period of time. This statement shows the amount of money a company makes and the expenses incurred by the company. The difference between them shows the net position of a business. The equation is depicted by Net Income = Revenues (sales) – Expenses (cost of goods sold). Revenues are what a business makes from sales.
My View on ABP