Basic Accounting Equation: Assets = Liabilities + Owner’s Equity

Expanded Equation: Assets = Liabilities + Owner’s Capital - Owner’s Drawings + Revenues - Expenses

Assets are resources a business owns. The business uses it in carrying out such activities as production and sales. Its common characteristic possessed by all assets is the capacity to provide future services or benefits. These are items that are of value and are owned by the entity for which you are accounting.

Liabilities are claims against assets— that is, existing debts and obligations. Businesses of all sizes usually borrow money and purchase merchandise on credit.

Owner’s Equity is the ownership claim on total assets in owner’s equity. It is equal to total assets minus total liabilities. It is increased by an owner’s investments and revenues from business operations and is decreased by an owner’s withdrawals of assets and expenses.

Transactions are a business’s economic events recorded by accountants. It may be external or internal.

Transaction 1: Investment by Owner. +Cash, +Owner’s Capital

Transaction 2: Purchase of Equipment for Cash. -Cash, +Equipment

Transaction 3: Purchase of Supplies on Credit. +Supplies, +Liabilities

Transaction 4: Services Performed for Cash. +Cash, +Revenues

Transaction 5: Purchase of Advertising on Credit. +Accounts Payable, -Expenses

Transaction 6: Services Performed for Cash and Credit. +Cash, +Accounts Receivable, +Revenues

Transaction 7: Payment of Expenses. -Cash, -Expenses

Transaction 8: Payment of Accounts Payable. -Cash, -Accounts Payable

Transaction 9: Receipt of Cash on Account. +Cash, -Accounts Payable

Transaction 10: Withdrawal of Cash by Owner. -Cash, -Owner’s Drawings

Financial Ratios express the relationship among selected items of financial statement data. It expresses the mathematical relationship between one quantity and another. Expressed in terms of either a percentage, a rate, or a simple proportion.

Liquidity Ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected cash needs.

Current Ratio is a widely used measure for evaluating a company’s short-term debt-paying ability.

Acid Test Ratio is a measure of a company’s immediate short-term liquidity.

Accounts Receivable Turnover isused to assess the liquidity of the receivables.

Inventory Turnover measures the number of times, on average, the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory.

Profitability Ratio measures the income or operating success of the company for a given time.

Profit Margin is also called the rate of return of sales and is a measure of the percentage of each dollar or sale that results in net income.

Asset Turnover measures how efficiently a company uses its assets to generate sales.

Return on Assets is an overall measure of profitability.

Return on Common Stockholders Equity shows how many dollars of net income the company earned for each dollar invested by the owners.

Earnings Per Share (EPS) is a measure of the net income earned on each sharer of common stock.

Price-Earnings Ratio is a widely used measure of the ratio of the market price of each share of common stock to the earnings per share.

Payout Ratio measures the percentage of earnings distributed in the form of cash dividends.

Solvency Ratio measures the ability of a company to survive over a long period of time.

Debt to Assets Ratio measures the percentage of the total assets that creditors provide.

Times Interest Earned indicates the company’s ability to meet interest payments as they come due.