Basic Accounting Equation

The basic accounting equation is ALOE where Assets = Liabilities + Owner's Equity. This is usually found on the balance sheet and can give a pretty good snapshot of where a company stands - provided there were "alterations." Retained earnings falls under shareholder's/owner's equity in the balance sheet and represents the accumulated amount of income a company still possesses after taxes and dividends. That means that any earnings left over after obligations, the company can use to re-invest and build the company. A statement of retained earnings can read as follows: Beginning Balance Retained Earnings + Net Profit - Dividends - Taxes = Ending Balance Retained Earnings.The income statement displays a specific period of time. A basic equation for this accounting instrument is:Sales - COGS (Cost of Goods Sold) = Gross Profit - Expenses - Depreciation - Other Expenses = Earnings Before Interest and Taxes (EBIT) - Interest - Taxes = Net Income/Net Profit-LossThink of the balance sheet as the foundation of the business and the income statement as a quick summary of time. This statement is also known as the Profit & Loss (P&L). Using an income statement we can compare gross margins, expenses increase/decrease, and even specific product revenues increase/decrease - if it was so detailed. A statement of retained earnings is usually attached to the income statement with the formula and data mentioned above. I have found these forms to be the key pieces to a business plan to be approved by lenders. They will generally try to pieces together the same information through bank statements, tax returns, etc. but once you have established a relationship with a bank through honest and consistent reporting of financial data and status, it should be easier to get a loan. In my experience with these, I have also seen many such statements "fudged" by sellers that, at times, are so blatantly wrong that you can immediately use it to determine the character of the person you will be dealing with. Imagine that, using accounting to describe a person.