Coming from an engineering background, I never thought I would one day be fascinated about acquiring any form of accounting knowledge until I met the faculties of the Corporate Financial Accounting course at Lagos Business School. After two weeks of intensive classroom learning, a couple of webinars, and a capstone project down the line, I am beginning to feel like an account in the making. I believe my newfound love for the study of accounting is largely due to the unique method used by the faculties to explain complex accounting principles using easily to relate simple everyday concepts. Below are some of the exciting new things I have learned on my journey so far.
Universal Accounting Equation:
This is one of the most important equations in the study of accounting. It simply states that the asset of any entity is the combination of its liabilities and owner’s equity. It is simply written as:
A = L + OE
The Asset (A) could be in form of physical equipment or buildings; or monetary terms, in form of cash and other receivables; that are owned or managed by an entity for the purpose of receiving something of value in the future. It is broadly classified as an income-generating asset or a non-income-generating asset.
Liabilities (L) is the obligation of an entity to deliver something of value in the future to another entity. It could be in form of bank loans, trade payables, or revenue received in advance for future services. It is broadly classified as interest-bearing or non-interest-bearing. All forms of liabilities come with some level of associated risks. Where available, the non-interest-bearing liabilities are more desirable for business funding.
Owner’s Equity (OE) is simply what is left of an entity’s assets after the deduction of its liabilities. It is composed of the capital contributed by the owners of a business and capital realized from the running of the business, called earned capital. Earned capital is a measure of how profitable the business venture is.
Making Sense of a Company’s Annual Final Report
A company’s financial report provides a rich source of information for making sound investment decisions. Below are the four +1 major accounts found in financial reports.
- Statement of profit or loss, commonly known as income statement
- Statement of financial position, also known as balance sheet
- Statement of changes in equity
- Statement of cash flows
+1. Notes to the financial statements
Analysis of the four key accounts listed above helps investors determine the performance of the business and ultimately decide whether to invest in it or not.
Although my journey into the new world of accounting has just started, I have already been equipped with the basic skill required to make sense of the content of a financial report, conduct basic analysis on the various type of financial statements to generate business insights that could be used for investment decisions.
In my future post, I will be sharing my experience working on the capstone project with my wonderful teammates.