Page 20 - 190_

20
Owner’s equity = assets – liabilities

(The owner’s equity is equal to the assets minus the liabilities).

For a sole proprietorship or partnership, the owner’s equity is shown as the difference
between assets and liabilities. In a partnership, each partner’s share of the ownership is reported

separately by each owner’s name. For a corporation, the owner’s equity is usually referred to as
stockholder’s equity or shareholder’s equity. It is shown as the total value of its stock, plus retains

earnings that have accumulated to date.

By moving the above three terms algebraically, we obtain the standard form of the
accounting equation:

Assets = liabilities + owner’s equity
(The assets are equal to the liabilities plus the owner’s equity).

3. A BALANCE SHEET

A balance sheet (or statement of financial position), is a summary of a firm’s assets,
liabilities, and owner’s equity accounts at a particular time, showing the various money amounts

that enter into the accounting equation. The balance sheet must demonstrate that the accounting
equation does indeed balance. That is, it must show that the firm’s assets are equal to its liabilities

plus its owner’s equity. The balance sheet is prepared at least once a year. Most firms also have

balance sheets prepared semiannually, quarterly, or monthly.

4. AN INCOME STATEMENT

An income statement is a summary of a firm’s revenues and expenses during a specified

accounting period. The income statement is sometimes called the statement of income and
expenses. It may be prepared monthly, quarterly, semiannually, or annually. An income statement

covering the previous year must be included in a corporation’s annual report to its stockholders.

5. THE IMPORTANCE OF THE ABOVE TWO STATEMENTS

The information contained in these two financial statements becomes more important when

it is compared with corresponding information for previous years, for competitors, and for the
industry in which the firm operates. A number of financial ratios can also be computed from this

information. These ratios provide a picture of the firm’s profitability, its short-term financial

position, and its activity in the area of accounts receivables and inventory, and its long-term debt