After completing this chapter, you will be able to do the following:

  • Explain the relationship of financial statement elements and accounts and classify accounts into the financial statement elements.
  • Explain the accounting equation in its basic and expanded forms.
  • Explain the process of recording business transactions using an accounting system based on the accounting equation.
  • Explain the need for accruals and other adjustments in preparing financial statements.
  • Explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity.
  • Describe the flow of information in an accounting system.
  • Explain the use of the results of the accounting process in security analysis.


  • Business activities can be classified into three groups: operating activities, investing activities, and financing activities.
  • Companies classify transactions into common accounts that are components of the five financial statement elements: assets, liabilities, equity, revenue, and expense.
  • The core of the accounting process is the basic accounting equation: Assets=Liabilities+Owners’ equity.
  • The expanded accounting equation is Assets=Liabilities+Contributed capital+Beginning retained earnings+Revenue−Expenses−Dividends.
  • Business transactions are recorded in an accounting system that is based on the basic and expanded accounting equations.
  • The accounting system tracks and summarizes ...

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