Accounting Equations and Financial Analysis

Accounting Equations

The Basic Accounting Equation

• Assets = Liabilities + Equity
• This equation represents the relationship between a company's resources (assets), debts (liabilities), and ownership interest (equity)

Expanded Accounting Equation

• Assets = Liabilities + Common Stock + Retained Earnings
• This equation breaks down equity into its two components: common stock and retained earnings

Accounting Equation Analysis

• Increases in assets:
  • Increase equity if financed internally (e.g., retained earnings)
  • Increase liabilities if financed externally (e.g., loans)
• Decreases in assets:
  • Decrease equity if used internally (e.g., dividends)
  • Decrease liabilities if paid off externally (e.g., debt repayment)
• Increases in liabilities:
  • Increase assets if used to acquire resources
  • Increase equity if incurred to benefit owners (e.g., salaries)
• Decreases in liabilities:
  • Decrease assets if used to pay off debts
  • Decrease equity if used to benefit owners (e.g., dividends)

Importance of Accounting Equations

• Helps to ensure accuracy and consistency in financial reporting
• Provides a framework for analyzing and understanding financial transactions
• Allows for the preparation of financial statements, such as the balance sheet and income statement

Prueba sobre la ecuación contable básica y ampliada, análisis de aumentos y disminuciones en activos y pasivos, y la importancia de las ecuaciones contables en la preparación de estados financieros.