Page 44 - Finance for Non-Financial Managers

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The Structure and Interrelationship of Financial Statements
such as the cash that was
paid to the dealer to get
The calculated amount of
the truck, or they will add Stockholders’ equity 25
the total assets of a com-
something to a bucket on pany that would theoretically remain
the Liability side, like the if all the assets were sold off and all
bank loan for the money the liabilities paid off. It is typically
composed of the total amount invest-
that was borrowed to pay
ed in the company by its owners plus
for the truck.
the accumulated profits of the busi-
Thus the scale is still in
ness since inception.
balance and the company
has a self-checking system
to ensure the entire transaction has been recorded. Assuming
the accountants have picked the right account buckets, the
details of each transaction will be correctly captured and avail-
able for review at any time in the future. Codes attached to each
piece of data enable the accountants to connect all the data
pieces that were added to the scale as part of that particular
entry, should the entire transaction need to be reconstructed in
the future. For example, those various flags enable Accounting
to know what was bought, from whom, for how much, on what
date, and where it will appear in financial reports.
It is not a reflection of the actual amount that would be real-
ized if the company were actually liquidated, however, because
liquidation always produces actual net proceeds different from
the amounts recorded for assets and liabilities. Thus, stockhold-
ers’ equity is a guide, rather than an accurate measure of the
owners’ relative share of the business. Other terms that mean
the same include owners’ equity (often used for a sole propri-
etorship or partnership), net worth, capital accounts, equity,
and surplus (not-for-profit organizations).

Accrual Accounting—Say What?

The accounting rules outlined in GAAP (Remember Chapter 1?)
require that most companies keep their accounting records on
the accrual basis. The alternative is the cash basis, meaning a
transaction is recorded only when cash changes hands. Cash