Introduction to Financial Accounting – Study Guide
Purpose of Financial Accounting
Financial accounting records, summarizes, and reports financial information for external users such
as investors, lenders, and regulators.
Learning Objectives
• Understand the accounting equation.
• Identify assets, liabilities, equity, revenues, and expenses.
• Prepare basic journal entries.
• Interpret the four primary financial statements.
Accounting Equation
Assets = Liabilities + Shareholders' Equity
Assets: resources owned by a business.
Liabilities: obligations owed to others.
Equity: owners' residual interest.
The Four Financial Statements
1. Income Statement – reports revenues, expenses, and net income.
2. Statement of Retained Earnings – explains changes in retained earnings.
3. Balance Sheet – reports assets, liabilities, and equity.
4. Statement of Cash Flows – reports operating, investing, and financing cash flows.
Debit and Credit Rules
AccountIncreaseDecrease AssetsDebitCredit LiabilitiesCreditDebit EquityCreditDebit
RevenueCreditDebit ExpensesDebitCredit
Example Journal Entry
A company purchases equipment for $5,000 in cash.
Debit Equipment $5,000
Credit Cash $5,000
Practice Questions
1. State the accounting equation.
2. Which financial statement reports net income?
3. Name three asset accounts.
4. What is the purpose of the statement of cash flows?
5. When does an expense increase?