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Lesson 1: Course Orientation and Review of Accounting Cycle

The Accounting Equation

The basic accounting is represented by:

Assets equal liabiliites plus stockholders' equity
Figure 1.2. Basic Accounting Equation

All transactions must either directly or indirectly flow through this equation. The foundation for the double-entry system of accounting is that for every debit there must be a credit, and for every credit there must be a debit. However, it should be noted that it is possible for a transaction to only affect either the left-hand side of the equation or only the right-hand side.

The above equation can be expanded to show the accounts that flow through stockholders' equity.

Assets equals liabilities plus stockholders' equity. Stockholders' equity is composed of common stock plus retained earning minus dividends minus revenues minus expenses.
Figure 1.3. Accounts Flowing Through Stockholders' Equity

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