Learn to analyze transactions like an accountant!
For each transaction, identify the accounts, their types, and whether they increase or decrease — then trace how the four financial statements connect (articulate) at the end.
Accountants analyze every transaction in 3 steps:
| Step | Question | Example |
|---|---|---|
| Step 1 | Which accounts change? | Cash, Equipment |
| Step 2 | What type is each? | Asset, Asset |
| Step 3 | Increase or decrease? | Cash ↓, Equipment ↑ |
Ask yourself:
Owner's Drawings (proprietorships) and Dividends (corporations) are classified as Equity, but they decrease total equity.
Note: The Drawings/Dividends account balance itself goes up, but the effect on total equity is a decrease.
The four financial statements are prepared in a specific order because each one feeds the next. The numbers articulate — they flow from one statement into another.
Beginning RE + Net Income − Dividends = Ending RE
The SOE takes Net Income off the Income Statement, subtracts Dividends (or Owner's Drawings), and produces Ending Retained Earnings. That ending number then sits in the Equity section of the Balance Sheet.
When Lumina Devices reports a $1.4 billion quarterly profit on its Income Statement, that exact Net Income figure appears as an addition on the Statement of Stockholders' Equity. The new Ending Retained Earnings then ties to the Equity section of the Lumina Devices Balance Sheet — and the Lumina Devices Ending Cash on the SCF must equal the Cash line on the BS to the penny. If any number breaks, the statements don't articulate and the audit fails.