Principles of Financial Accounting Chapter 2 (College Accounting 15th Edition)

Statement of Owner's Equity

Reports the changes that occurred in the owner's financial interest during the reporting period. Prepared before the balance sheet so that the amount of ending capital balance is available for presentation on the balance sheet.

Net Loss

Results when expenses are greater than revenue for the period.

Break Even

Results when revenue and expenses are equal to each other for the period.

Net Income

Results when revenues are greater than expenses for the period.

Heading of Income Statement

WHO, WHAT, AND WHEN. The name of the business, the report title (Income Statement title), the accounting period recorded. Ex: Eli's Consulting Services Income Statement Month Ended December 31, 2019.

Liabilities

Debts or obligations that a business owes to other entities.

Accounts Receivable

Amounts owed by customers on account.

Accounts Payable

Amounts to be paid in the future to creditor(s) for goods or services already acquired.

Business Transaction

Any financial event that changes the resources of a firm. For example: purchases, sales, payments, and receipts of cash are all business transactions.

Buying on Account

Charge account, or open-account credit, with amounts owed to creditor(s).

Selling on Credit

Clients of the business owe the business money for products or services provided within a predetermined set period of time.

Total Financial Interest Calculation

Creditors' Claims + Owners' Claims.

Withdrawals (by owner)

Funds taken from the business by the owner for personal use. Withdrawals are not a business expense, but they result in a decrease in owner's equity (owner's financial interest in the business).

Property=Financial Interest

In a free enterprise system, all property is owned by someone. The owner of the business supplies the property (cash), therefore they have financial interest in the business.

Revenue (Income)

Inflow of money or other assets that that results from the sales of goods or services or from the use of money or property. A sale on account does not increase money, but it does create a claim to money. When a sale occurs, the revenue increases assets and also increases owner's equity.

Heading and Contents of Statement of Owner's Equity

Name of the business, report title (Statement of Owner's Equity, and the reporting period. Ex: Eli's Consulting Services Statement of Owner's Equity Month Ended December 31, 2019 Starting Capital, Net Income/Loss, Less/More Withdrawals, Increase/Decrease in Capital, Ending Capital Ex: Trayton Eli, Capital, December 1, 2019 (Right) Net Income for December (Left) Less Withdrawals for December (Left) Increase in Capital (Right) Trayton Eli, Capital, December 31, 2019 (Right) Other Investments would appear as separate lines (whether it be cash or other assets recorded at fair market value).

Expense (not to be confused with liability)

Outflow of money , the use of other assets, or the INCURRING of a liability. Expenses include the costs of any materials, labor, supplies, and services used to PRODUCE REVENUE. Expenses cause a decrease in owner's equity, and the overall assets of a business.

Equity Capital (Personal Capital)

Owner's financial interest in the business.

Balance Sheet

Shows the firm's financial position with respect to assets and liabilities at a specific point in time. Assets are listed on the left side of the balance sheet, and liabilities and owner's equity is listed on the right side of the balance sheet. Similar to the equation property=financial interest.

Income Statement (Profit and Loss Statement OR Statement of Income and Expenses OR Statement of Operations)

Shows the results of business operations for a specific period of time. Shows the difference between revenue earned and the expenses of doing business. Results in Net Income, Net Loss, or "Break Even".

Fair Market Value

The current worth of an asset or the price the asset would bring if sold on the open market.

Owner's Equity (Proprietorship or Net Worth)

The owner's claims to the assets of the business.

Assets

The property that a business owns.

The Fundamental Accounting Equation

The relationship between assets and liabilities plus owner's equity (Assets=Liabilities +Owner's Equity). The sides of the equation should remain in balance, hence the name balance sheet.