Chapter 2

Separate Entity Assumption

Accounts for a business separate from its owners

Liabilities

Amounts presently owned by the business

Transaction

An exchange or event that has a direct and measurable financial effect

A company purchases for $21,000 cash a new delivery truck that has a list ("sticker") price of $24,000

Cash Account given; Equipment Account received

A company purchases a peice of land for $50,000 cash. An appraiser for the buyer valued the land at $52,500

Cash Account given; Land Account received

A company pays $1,500 owed on its ten-year note payable

Cash Account given; Note-Payable (long-term) received

A new company is formed and issues 100 share of stock for $12 per share to investors

Contributed Capital Account given; Cash Account received

Retained Earnings

Cumulative earnings of a company that are not distributed to the owners

Accounts Receivable Account

Current Asset, Debit Balance

Cash Account

Current Asset, Debit Balance

Supplies Account

Current Asset, Debit Balance

Accounts Payable Account

Current Liability, Credit Balance

Income Taxes Payable Account

Current Liability, Credit Balance

Current Assets

Economic resources to be used or turned into cash within one year

Duality of Effects

Every transaction has at least two effects

Debit

Increase assets; decrease liabilities and stockholders' equity

The owner of a local company uses a personal check to buy a $10,000 car for personal use. Answer from the company's point of view

No Company Transaction

A women's clothing retailer orders 30 new display stands for $300 each for future dilvery

No Exchange Transaction

Equipment Account

Noncurrent Asset, Debit Balance

Land Account

Noncurrent Asset, Debit Balance

Notes Payable (due in three years) Account

Noncurrent Liability, Credit Balance

A company borrows $2,000 from a local bank and signs a six-month note for the loan

Note Payable (short-term) Account given; Cash Account received

A company orders and receives 10 personal computers for office use for which it signs a note promising to pay $25,000 within three months

Note Payable (short-term) Account given; Equipment Account received

Balance Sheet

Reports assets, liabilities, and stockholders' equity

Contributed Capital Account

Stockholders' Equity, Credit Balance

Retained Earnings Account

Stockholders' Equity, Credit Balance

Notes Payable

The account credited when money is borrowed from a bank using a promissory note

Assets = Liabilities + Stockholders' Equity

The basic accounting equation