This equation is the foundation for the double-entry bookkeeping system because there are two or more accounts affected by every transaction.
If the equation is rearranged:
The above equation shows that the owners' equity is the residual claim of the owners. It is the amount left over after liabilities are deducted from assets.
Owners' equity at a given date can be further classified by its origin: capital provided by owners, and earnings retained in the business up to that date.
Net income is equal to the income that a company has after subtracting costs and expenses from total revenue.
Net income is informally called the "bottom line" because it is typically found on the last line of a company's income statement.
Balance sheets and income statements are interrelated through the retained earnings component of owners' equity.
The following expanded accounting equation, which is derived from the above equations, provides a combined representation of the balance sheet and income statement:
Because dividends and expenses are deductions from owners' equity, move them to the left side of the equation:
Using the accounting equation: Assets = Liabilities + Stockholders' Equity, liabilities were $45,000 at the beginning of the year ($85,000 = $45,000 + $40,000). During the year, assets increased by $30,000 to $115,000 and liabilities increased by $35,000 to $80,000. Using the accounting equation again, stockholders' equity is determined to be $35,000 at year-end ($115,000 = $80,000 + $35,000).
The accounting equation is Assets = Liabilities + Stockholders' Equity. It states that the assets held by a business are equal to the claims against those assets. The claims against the assets are the owners' claims (stockholders' equity) and claims of creditors for outstanding loans to the business (liabilities). The equation may be restated as Assets - Liabilities = Stockholders' Equity.
I. Assets = Liabilities + Common Stock + Retained Earnings - Dividends - Revenues + Expenses
Assets = Liabilities + Common Stock + Beginning Retained Earnings - Dividends + Revenues - Expenses
Also, Assets + Dividends + Expenses = Liabilities + Common Stock + Beginning Retained Earnings + Revenues
Assets, 31 December 2013: $5,250
The analyst's estimate of net income ($ thousands) for 2013 is closest to:
Total assets = liabilities + owner's equity
December 31, 2013:
December 31, 2014:
In 2014, the company most likely ______
A. paid a dividend of $1,000.
Retained earnings = opening RE + net income - dividends
2014 Retained Earnings = 17,000 = 25,000 - 3,000 - Dividends
Dividends = 5,000