The Accounting Game: Chapter 1

Study Notes

Accounting is like a scorecard for your business
Businesses have two key sides: What we have and who owns it
What we have is also called assets
Assets are the things you own and use in your business
Things owned by the business are recorded on the left side of the scorecard
Assets are represented by the color blue
Who owns it is also called Liabilities and Owner's Equity, and they are recorded on the right side of the scorecard
Liabilities is the things you owe to others, it’s called Notes Payable and is represented by the color pink
Owner's Equity is what you own, it’s represented by the color black
Owner's Equity has two parts: Original Investment and Earnings Week To Date
Every business follows the basic rule: Assets = Liabilities + Owner’s Equity
This equality is called a Balance Sheet because the two sides balance each other out
The Balance Sheet is like a snapshot in time that shows an image of a business’s financial position

Lemonade stand is like a business, representing how anyone can start a business
Every business needs to keep track of money coming in and going out
Owner's Equity is initially financed through Original Investment
Owner's Equity can be increased by Earnings
The money used to buy supplies is an expense, and it decreases the amount in cash, which reduces the amount of assets in the business
Supplies used to create a product are called Inventory
The total cost of producing each unit is called Unit Cost
The difference between the cost of goods sold and the sales from selling goods is called Gross Profit.
Gross Profit is also called earnings or profits
Each sale made increases the business’ earnings, which increases owner’s equity
Each cost will decrease assets and profits, which also decreases owner’s equity

Expenses are all costs incurred running a business that are not related to producing or buying a product.
Expenses are paid out of cash reserves.
Examples of Expenses are: rent, advertising, glass rental (for a lemonade stand), and other things not directly linked to the cost of making the product

A Balance Sheet shows things the business owns, and the people who own or have a claim on those things
The left side of the Balance Sheet represents Assets or THINGS & STUFF that the business owns.
The right side of the Balance Sheet represents Liabilities and Owner’s Equity.
Liabilities represent the people the business owes money to. Owners' Equity is what the owner of the business owns.

An Income Statement is like a movie that shows the events over a period of time such as buying inventory, making a product, selling it, and incurring expenses.
Income Statements can have many other names including: Operating Statement, Profit & Loss (or P & L) Statement.
Income Statements reveal data not included in the balance sheet such as: sales, cost of goods sold, the amount of inventory purchased and sold, expenses, and earnings.