Financial Accounting: In an Economic Context

SUMMARY OF KEY POINTS

Two criteria necessary for economic events to be reflected in the financial statements.

Economic events must be both relevant and objectively measurable in monetary terms if they are to be reflected on the financial statements. Relevant events have economic significance to the company. Objectively measurable events must be backed by documented evidence. Economic events must be relevant so that they can be used to evaluate the financial condition of the company; they must be objectively measurable so that they can be audited and viewed as credible by users.

The accounting equation and how it relates to the balance sheet, income statement, statement of shareholders' equity, and statement of cash flows.

The accounting equation states that assets equal liabilities plus shareholders' equity. The main components of the accounting equation (assets, liabilities, and shareholders' equity) are divided into subcategories, called accounts, in which transactions are recorded and from which the financial statements are compiled. When a business transaction occurs, two or more accounts are increased or decreased in such a way as to maintain the equality of the equation.

The balance sheet contains the balances as of a given point in time of all the asset, liability, and shareholders' ...