Chapter 1 - Accounting in Business
Preparing a Balance Sheet
(Company Name) Balance Sheet October 31 Assets Liabilities Cash Accounts Payable Acc. Receivable Supplies Equity Land Common Stock Equipment Retained Earnings Total Assets Total Liability and Equity
Preparing a Statement of Retained Earnings
(Company Name) Statement of Retained Earnings For Month Ended Oct 31 Retained Earnings (Oct 1) Add: Net Income Less: Cash Dividends Net Loss Retained Earnings Oct 31
Liability
A liability is an amount owed by a business to someone else - a debt. A business may have a liability because it bought something and didn't pay cash for it at the time (they put it on a charge account). Or the business borrowed money from someone and liability is the loan needs to be repaid. Most liability records include the word "Payable" in the name such as Accounts Payable.
ABC Co. performs $200 of services for a customer, but does not get paid right away. Demonstrate how ABC Co. would record this transaction in the accounting equation
ABC Co. would increase the ACCOUNTS RECEIVABLE account and increase the REVENUE account in the accounting equation
Expanded Accounting Equation
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Accounting Equation
Assets = Liabilities + Equity.
Average Total Assets
Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2
Dividends of $60 cash are paid to the corps stockholders. You would record this transaction in the accounting equation by decreasing the ____ account and __________ the Dividends account.
Cash, Increasing
During September, Sally's Hair Salon purchased $900 of supplies on account. In October, Sally's wants to make a payment of $200 on this bill. Record the October transaction into Sally's accounting equation by
Decreasing accounts payable -200 and Decreasing Cash - 200
Bob's bakery is making a partial payment of $70 for baking supplies it purchased in a previous month. Record the transaction in the accounting equation of Bob's Bakery by
Decreasing the Accounts PAYABLE account and decreasing the CASH account.
Equity
Equity is the portion of a business's assets the owner(s) can claim as his or hers. To figure equity, add up all the assets owned by the business and subtract out all the debts (liabilities). What's left belongs to the owner(s). For a corporation, the items that effect equity are Common Stock, Dividends, Revenues and Expenses.
Statement of Retained Earnings
Explains changes from start of period to end of period. Will always be prepared AFTER the income statement. Beginning of Retained Earnings + Net Income (or Loss) - Dividends = Ended Retained Earnings.
Income Statement
Financial report or statement that identifies the revenues of a business for a specific time period and deducts from them the expenses for the same period.
Balance Sheet
Financial statement or report that identifies the assets, liabilities and equity of a business as of a particular date, usually the last day of the business' year.
Statement of Retained Earnings
Financial statement or report that summarizes the increases and decreases that have occurred in the retained earnings record for a specific period of time. Retained Earnings is increased by net income. It is decreased by dividends or a net loss.
Statement of Cash Flows
Financial statement that summarizes the major ways a business raised cash for its business and the major ways it spent cash during the same period.
Bob's Bakery receives its utility bill of $800 for the month and pays it immediately. Record this transaction in the accounting equation
Increase Expenses and decrease Cash
When using the accounting equation, recording the purchase of equipment for cash would include an ________ to the equipment account and a ________ to the cash account.
Increase, Decrease
On May 1, Mary's Morsels Company provided catering services at a wedding. The bride is billed $4000 and will pay during the following month. Record this transaction on May 1 in the accounting equation of Mary's Morsels by
Increasing Accounts Receivable and increasing Revenue
Russel's Consulting Services Company provided $1000 of services to the local college and immediately collected $700, but the college wants to pay the rest next month. Record this transaction in the accounting equation for Russell's Consulting Service by..
Increasing BOTH cash and Accounts Receivable; and increasing Revenues
Jackson's Catering Company provided cookies worth $3000 to the local college. The college paid immediately. Record this transaction in Jackson's accounting equation by
Increasing Cash and Increasing Revenues
A customer of Landen Consulting Company makes a $400 payment of cash on a bill for services provided last month. Record this transaction into the accounting equation of Landen Consulting by
Increasing cash - 400 and Decreasing Accounts Receivable - 400
Account Payable
Money that a business owes someone else. Normally a business has an account payable because it bought something and didn't pay cash for it at the time. The business charged it instead and has agreed to pay for it in the near future. Accounts Payable are liabilities.
Account Receivable
Money that is due to a business. Most of the time, a business has an account receivable because it sold something or completed a service but, at that time, the customer didn't pay cash for it. However, the customer has agreed to pay the business the cash sometime in the near future. The customer's promise to pay the business is an account receivable. Accounts receivable are assets to a business.
Net Income Equation
Net Income = Revenues - Expenses
Net Income/Net Loss
On an income statement, if revenues are higher than expenses, the business will report net income. If expenses are higher than revenues, then the business will report a net loss. The term "net" is important because it means that the expenses have already been deducted from the revenue.
Common stock
Part of contributed capital, reflects inflows of resources such as cash and other net assets from stockholders in exchange for stock (later chapters identify other parts of contributed capital).
Return on Assets
ROA = Net Income/Average Total Assets
Which of the following lists of accounts would belong on the statement of retained earnings?
Retained earnings and Dividends
Corporations equity has two main parts
Retained earnings and common stock.
Four major types of transactions that affect equity
Revenue accounts, expense accounts, dividends, and common stock.
Revenue
Revenue is money earned by a business by providing a service or selling something. For example, the fee a dentist receives for filling a cavity is his revenue. The amount a customer pays for a pizza is revenue to a pizzeria. Revenue records have names like Sales, Service Revenue, Rental Revenue, Interest Income, or just plain Revenue.
Johna's Plant Nursery Company pays the salaries of its two employees. How will this transaction affect the accounting equation?
Salaries expense will be increased, Equity will be decreased
Asset
Something a business has to help it run its business. Cash, land, equipment, supplies and inventory are examples of assets.
When supplies are purchased on credit it means..
The accounts payable account will be INCREASED A liability has been incurred The business will pay for the supplies at a later time
Expense
The value of what a business uses up to run its operations. For example, for a pizzeria, it's the value of the cheese and pepperoni it used to make the pizza and the cost of the boxes they put the pizzas in. It's also the value of the utilities it used up to the run a store and the value of wages it paid its employees. Expense records usually have the expense in their titles.
Prepaid Expenses
Things or services a business buys first and then uses up later. For example, a business may pay for its insurance a year at a time. The amount it pays is kept in a record called Prepaid Insurance. It's an asset because the business has it to use for the next year to run its business. As the insurance coverage expires, becomes an expense. Supplies and rent are also examples of prepaid expenses.
