Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Defining equity in the context of financial accounting
- Performance of equity in relation to performance
- Equity recorded on financial statements
- Real world examples of changes in equity



Let's look at the third concept that is recorded on the balance sheet; equity. Also referred to as owners' equity, this value represents the total assets of a business that is available to distribute to shareholders. The equity is left over after the liabilities are deducted.

A common misconception is that the value of equity reflects the value of the business. The potential sale or acquisition price of the business is not correlated to the equity figure as it takes into account many other factors such as intellectual property and perceived value.
 
Think of equity as what belongs to the business owners, after all financial obligations are satisfied. The accounting equation that we will talk about in the next lesson, explains that when you subtract the liabilities from the assets, you are left with the residual interest known as equity. Equity is the least tangible of the main three concepts and often the hardest to conceptualize.



Equity on the balance sheet is recorded in two categories: retained earnings and common shares. There are more types of accounts such as preferred stock that are detailed in more advanced accounting courses, but for the purpose of this lesson we will just look at the two components circled below on the balance sheet.

Common stock is the amount of money received from the sale of shares. This amount is essentially the ownership amount of the stockholders.
 
Retained earnings refers to the residual amount of profit left over after paying dividends and liabilities.



Take a look at the sample statement of retained earnings above. This figure is further broken down into based on the changes from the previous year.



When equity is constantly going up year over year, this can mean that the business is facing one of two scenarios.
 
The common shares values are increasing or the company is issuing out more shares, thus diluting the population.
The company is earning higher profits, in which case the retained earnings are going up.



Corporation A has 10 million in assets, 5 in liabilities and 5 in equity. Using the Accounting equation, Assets = Liabilities + Owners' Equity, this would equate to 5 million in Equity. If we assume there are 10 shareholders in the company then each person will have $500,000 invested in the company.
Corporation B has 850,000 in total assets and the same amount of $850,000 in liabilities. The shareholders will be left with $0 in equity.
Corporation D purchases a piece of commercial property for $500,000 but needs financing for $200,000 of the purchase. The remaining $300,000 in cash the business puts down is the equity, the amount of ownership they have in the asset. If the value of the property goes up to $600,000 and the property is sold, then you have to subtract the loan liability from the total sale price which will leave the corporation with $400,000 in equity.
  
As you can see in these examples, Equity is the amount after the liabilities have been subtracted from the assets. Essentially equity is the residual interest that belongs to the owners or stockholders.