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الاثنين، 15 سبتمبر 2014

learn accounting bit by bit with picture : balance sheet

Learn Accounting Bit by Bit

Balance Sheet
balance sheet

The fundamental accounting equation is the backbone of the accounting and reporting system.

It is central to understanding a key financial statement known as the balance sheet (sometimes called the
statement of financial position). 

The following illustration for Edelweiss Corporation shows a variety of assets that are reported at a total of $895,000. 

Creditors are owed $175,000, leaving $720,000 of
stockholders’ equity. The stockholders’ equity section is divided into the $120,000 that was originally
invested in Edelweiss Corporation by stockholders (i.e., capital stock), and the other $600,000 that
was earned (and retained) by successful business performance over the life of the company.

Does the stockholders’ equity total mean the business is worth $720,000? No! Why not? Because many assets are not reported at current value. 
For example, although the land cost $125,000, the
balance sheet does not report its current worth.
 Similarly, the business may have unrecorded
resources to its credit, such as a trade secret or a brand name that allows it to earn extraordinary profits.

 If one is looking to buy stock in Edelweiss Corporation, they would surely give consideration
to these important non-financial statement based valuation considerations. 

This observation tells us that accounting statements are important in investment and credit decisions, but they are not the sole source of information for making investment and credit decisions.

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