Basics of Accounting Equations - Part II Articles | Accounting

The stock holder’s equity has two components: contributed capital and retained earnings.

The money which each stock holder puts in to the running of the company’s business is called the contributed capital. This amount is usually divided into two segments called ‘par value’ and ‘additional paid in capital'. The retain earnings are amounts of money which are earned by the stock holders through the running of the company, but are kept aside by the company for future investments.

These earnings can get affected by three primary factors which are revenues, expenses and dividends.

Revenues and expenses are terms used to denote increase and decrease of stocks which come from the business operations whether it is online or offline business. The operating expense of an online business could be the expenses incurred for domain name and web hosting if you own websites.

Another example of revenue is when a customer is agreeable to pay the company for services to be rendered in the future. This amount is denoted as accounts receivable in the asset account which can show an increase in the asset value but a decrease in the stock holder’s amount of equity.

When the company agrees to provide services in the future, this is treated as an expense however.

This results in a decrease in asset value and increase in liabilities. Instances where revenues are more than expenses, the value is called net income. On the other hand, when the reverse happens, that is, expenses overshooting the revenue, it results in net loss. This is an indicator that you are in for trouble as your business costs are going beyond what you can earn from the same business.

When you barter your past earnings amongst the stock holders, it is called paying dividends which is distribution of assets. Dividends are not to be confused with expenses as both are diminishing the amount of retained earnings. Financial statements are ways of informing the people who have some stake in the business, regarding the performance of the business.

Financial statements can also be viewed as business models which show how a business is performing financially. But just like any other process, financial statements are not without its share of flaws.

Statement of income, of retained earnings, balance sheet, and the cash flow statement are the four main types of financial state which a business can have. An income statement summarizes the money the company has made as well as the expenses it has incurred to make that money. According to accountants, this is the most important financial statement as it shows whether the company has met its financial goals.

The statement of retained earning which shows the amount of retained earning within a stipulated period. The retained earnings will be nil when the company started out during a particular financial period.

Many companies treat the stock holder equity statement as the statement of retained earnings. This is a more detailed statement which not only tells you about the different aspects of retained earnings but also any alterations in the stock holders’ equity scenario. The month or yearend financial status of a company is shown through its balance sheet. This statement at a glance can tell you about the value of the business in terms of their assets and the corresponding claims against those assets which are the liabilities. The cash flow statement indicates the health of liquidity of a company. These depict the inflow and outflow of cash of a company. The difference in the inflow and outflow is the net cash flow. The statement shows the money generated by doing the business as well as details regarding any investment or financing transactions that may have occurred during a particular accounting period.