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In either case, the business recognizes total sales (cash and credit) as revenue for the period. Various terms are used in income statements to QuickBooks describe different sources of revenue (e.g., provision of services, sale of goods, rental of property). Maxidrive lists only one, sales revenue, in its income statement.

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In other words, the accounting equation will always be “in balance”. The accounting equation plays a significant role as the foundation of the double-entry bookkeeping system. It is based on the idea that each transaction has an equal effect. It is used to transfer totals from books of prime entry into the nominal ledger.

Financial statements

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What is the accounting equation

• Lenders also rely on future earnings to provide the resources to repay loans.
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• These are some simple examples, but even the most complicated transactions can be recorded in a similar way.
• This statement reflects profits and losses that are themselves determined by the calculations that make up the basic accounting equation.
• Every asset on the balance sheet is initially measured at the total cost incurred to acquire it.

We can learn a great deal about what the balance sheet reports just by reading the statement from the top. The balance sheet of Maxidrive Corp., presented by its former owners to Exeter Investors, is shown in Exhibit 1.2. The income and retained earnings of the accounting equation is also an essential component in computing, understanding, and analyzing a firm’s income statement.

• If a business does not pay its creditors, the creditors may force the sale of assets sufficient to meet their claims.
• When Maxidrive sells its disk drives to Dell and others, it sells them on credit and receives promises to pay called accounts receivable, which are collected in cash later.
• (statement of income, statement of earnings, or statement of operations) reports the accountant’s primary measure of performance of a business, revenues less expenses during the accounting period.
• Yesterday, US equity markets moved modestly higher extending the post-election rally with the S&P 500 closing above 6k for the first time.
• Companies earn revenues from the sale of goods or services to customers (in Maxidrive’s case, from the sale of disk drives).

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In our discussion of financial analysis thus far, we have focused on the perspectives of investors and creditors. Managers within the firm also make direct use of financial statements. For example, Maxidrive’s marketing managers and credit managers use customers’ financial statements to decide whether to extend credit for purchases of disk drives. Maxidrive’s purchasing managers analyze parts suppliers’ financial statements to see whether the suppliers have the resources to meet Maxidrive’s demand and invest in the development of new parts. Both the employees’ union and Maxidrive’s human resource managers use Maxidrive’s financial statements as a basis for contract negotiations over pay rates.

Examples of the accounting equation

Since Election Day the S&P 500 was up ~5%, the S&P 400 Midcap ~7% while the Russell 2k was up ~10% coming into today’s session. For the year the S&P 500 was up over 25% while the other two are both up now ~20%. With those sorts of gains in a short period of time it would not be surprising to see some profit taking and we’re getting just that today.

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(statement of income, statement of earnings, or statement of operations) reports the accountant’s primary measure of performance of a business, revenues less expenses during the accounting period. While the term profit is used widely for this measure of performance, accountants prefer to use the technical terms net income or net earnings. Maxidrive’s net income measures its success in selling disk drives for more than the cost to generate those sales. The organization for which financial a = l + se data are to be collected, called an accounting entity,the organization for which financial data are to be collected. On the balance sheet, the business entity itself, not the business owners, is viewed as owning the resources it uses and as owing its debts.