Essential Concepts

It is essential that you have a good grasp of the concepts in Figure 1.5 in order to progress smoothly in accounting studies. These terms will be explained in more detail and with examples in the next few pages. They form the basis of financial statements and are essential for properly analyzing transactions. Please spend enough time to master them.

Source: The Pennsylvania State University

Figure 1.5. Expanded Accounting Equation

Assets equals liabilities plus owner’s equity.

Owner’s equity equals capital plus retained earnings.

Retained earnings equals prior year retained earnings plus revenue less expenses less dividends.