In my last post relating to corporate financial accounting, I did a break on the backgrounds needed before going into corporate business accounting proper and I did it based on a structure of business operations from start (funding or fund sourcing) to purchasing assets for business operations to getting revenue to incurring costs and ultimately making profit or loss. All these are best understood so as to see reason or understanding when working with rules used in entering transactions. In the last post I stopped at assets: tangible and intangible. So, I will be explaining the others in continuation of the las post for easy assimilation to any reader. So, in continuation, we take the next component of financial statements which is liabilities, equity, revenue, expense
Liabilities: Now there are ideas or what is called street definition. Street definition means a brief description of a term from the point of view of groups practice. So there such definition for liabilities with a default inclusion of assets. It goes like this; assets are what puts money in your accounts but liabilities are what take money from your account but in corporate accounting assets are anything owned or controllable by the business that can provide economic benefit in the future whether long term, short term or mid term while liabilities are the business’s financial obligation that results in future sacrifices of economic benefit to other entities or businesses. Examples of liabilities are loans, accounts payable (purchases or any benefit on credit), deferred revenue, warranties and accrued expenses. So yes; liabilities take money from you but it was not as simple or as basic as the street definition. But most important: Liabilities are components of a financial statement just like assets. So, what’s next? Expenses.
Expenses: Expenses are like liabilities but immediate more like incurred, as in they are cost that come to you: the are cost in running a business’s operations. So, expenses come from operations for example; wages, salaries, maintenance, rent, electricity etc. some people define it as cost incurred in the effort to generate revenue from a business. So, they are the sum of all the activities that hopefully generate profit. The last sentence was stated like that because, profit is not the only outcome in a business: sometimes, it is loss. Now as we stated expenses are incurred in the effort to raise revenue. So, our next component of discussion would be revenue.
Revenue: Revenue is the total income or amount of money from the sale of the primary product or service of a business. Some simply call it gross sales. In corporate accounting, it is referred to as top line because it the first stated value in an income statement which is one of the financial statements used in analyzing the financial health of a business. And the last but not the least and in fact the first part of all this is equity.
Equity: Equity is the amount of capital invested or available share ownable in a business. Now in arithmetic terms, it is calculated as (company’s total assets – company’s total liabilities). It is also referred to ass the company’s book value and in simple practical terms, equity is the amount of money or assets given to owners/shareholders of a company if all of its assets were sold all of its debts were paid off.
These are the components of a financial statement and I hope this write up helped you understand them. We will be looking at the different statements in the following posts.
I’m not sure again!