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Hi, Else here.
And in this video, we're going to connect the equation
to the definition of each of the elements.
Let's just quickly remind ourselves
of the interconnection between the elements first
and then I'll connect it to the definitions.
Again, I like to use the diagram more than the formula,
but you can use whichever one you're more comfortable with.
First, we have all the elements, as well as
some of the sub elements that make up
the expanded equations, things like retained earnings
and dividends.
Let's put them all together, starting
with the basic accounting equation.
The basic accounting equation, of course,
is starting with assets equal liabilities plus equity.
What makes up equity?
Equity is made up of owner's capital and retained earnings.
What is retained earnings made up of?
Retained earnings is made up of profit minus dividends.
And what is profit made up of?
Profit is made up of revenues minus expenses.
All right.
Let's just make the interconnection
between these items very clear.
Equity tied into owner's capital, retained earnings.
Retained earnings is made up of profit less dividends.
And profit is made up of revenue minus expenses.
All right.
So we've got the equation.
We're going to figure out how the definition ties into this.
So I've got a random list of the definitions.
And we're going to tie them in.
We've got, owed to third parties.
I happen to know owed is a liability.
Profit retained-- profit which is
kept in the business for future expansion.
That's going to go over.
And it's the definition of retained earnings.
Owned-- the only thing we own in a business is the assets.
Owed to owners-- we know we either owe it to third parties
or we owe it to the owners.
Settled in the future-- the only thing
that's going to be settled in the future is a liability.
Due to a past event-- liabilities
or due to past events.
Used, consumed, or incurred- that can only
be true of expenses.
Must have a future benefit-- assets
must have a future benefit.
Investment by owners-- that is owner's capital, when
owners give cash to the business in order to start the business.
Earned-- earned is connected to revenue.
Revenue must be earned in order to be recorded.
Past event-- assets are due to a past event.
Help generate revenue-- the only thing that
helps generate revenue is the expenses that have been
used, consumed, or incurred.
Provided a service-- the only way
we earn revenue is we must have provided a service
or delivered a good.
Distribution to owners-- when we pay a dividend,
we are distributing profits to the owners.
So let's look at this one more time.
We have our assets.
Assets must be owned, have future economic benefit,
and they are due to a past event.
Liabilities-- they are owed to third parties.
They have to be settled in the future.
That's either going to be paid in cash, goods, or services.
And they are due to a past event.
Equity is what is owed to the owners by the business.
Owner's capital-- that's the investments that the owners
have made in the business.
Retained earnings-- that is the profit kept in the business
for future expansion.
Profit, we'll describe in a moment.
Dividends-- distribution to owners.
That's when we paid part of the profit to the owners.
Profit is made up of two things-- revenue,
which must be earned, that means we must have provided-- notice
the past tense-- a service or delivered-- again,
the past tense-- a good, and finally expenses
used, consumed, or incurred.
So this is a cost that has helped us in order
to generate the revenue.
Notice that revenues lead and expenses follow.
Note that this should be memorized
before you go any further in any of these chapters.
See you in the next video.
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