FINANCIAL ACCOUNTING CONCEPTS

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Financial Accounting ConceptsFinancial Accounting Concepts

An Income Statement reflects the differences between the revenues and expenses of a business over a period of time. Therefore, the items that are considered under this account are the Sales – which includes both cash and credit sales. Expenses include the cost of goods, which consists of all the expenses that are incurred by a business – from the stage of purchase of raw materials to the actual sale of the goods, including the overhead costs.(www.cbdd.wsu.edu, n.d.). Income statements do not reflect all the assets and liabilities of the Company. These are represented in a summarized, consolidated statement that shows the overall financial  position of the Company and provides information on assets, liabilities and owner’s equity.

Equity holdings are represented in financial statements as separate accounts that are listed under “Liabilities and Owner’s equity” (Financial statements, n.d.). Equity is listed under the liabilities section of a Company’s financial statements, because it would constitute a claim upon the assets owned by the Company. In a financial statement, the equity account provides a complete financial picture of the organization under this category of liabilities owed by the Company in the event of a financial crisis, although not all available equity may be active in a particular financial period.

Therefore, in Dr. Leo Krusack’s accounts, furniture and equipment would qualify as assets, while Leo’s deposits from his own funds would be construed as owner’s equity. Two categories of costs exist – fixed and variable. Costs such as utilities, rent and salaries would come under the category of variable costs while expenses on furniture would be fixed costs. Sales made on credit would be classified as “Accounts receivable”………………………………………………………………………………………………………………….

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