ACCT 4A(1.3)(What Is The Accounting Equation?)

Dividends

A profitable corporation may make distributions to stockholders in the form of dividends. Dividends can be paid in the form of cash, stock, or other property. Dividends are not expenses. However, they are the opposite of owner contributions and, therefore, decrease equity.

Examples of Liabilities

Accounts Payable(30 days credit) Notes Payable Salaries Payable Unearned Income

Liabilities

Are debts that are owed to creditors. Liabilities are something the business owes and represent the creditors' claims on the business's assets.

Expansion of Accounting Equation

Assets= Liabilities + Common Stock- Dividends+ Revenue- Expenses Businesses strive for net income. When revenues are greater than expenses, the result of operations is a profit or net income. When expenses are greater than revenues, the result is a net loss.

Examples of Equity

Contributed Capital(increase) Revenues(increase) Dividends(decrease) Expenses(decrease)

accounting equation

It measures the resources of a business (what the business owns or has control of) and the claims to those resources (what the business owes to creditors and to the owners). The accounting equation is made up of three parts—assets, liabilities, and equity—and shows how these three parts are related. Assets= Liabilities + Equity

Equity

The owners of a corporation are referred to as stockholders (also called shareholders). The owners' claims to the assets of the business. Equity represents the amount of assets that are left over after the company has paid its liabilities. It is the company's net worth. Equity increases with owner contributions and revenues. Equity consists of two main components: contributed capital and retained earnings.

Revenues

These are earnings that result from delivering goods or services to customers. Examples of revenues are Sales Revenue, Service Revenue, and Rent Revenue. This increases equity.

contributed capital

This is owner contributions. A stockholder can contribute cash or other assets (such as equipment) to the business and receive capital. The basic element of contributed capital is stock, which the corporation issues to the stockholders as evidence of their ownership. Common stock represents the basic ownership of every corporation. This increases equity

Retained Earnings

This is the equity earned by profitable operations that is not distributed to stockholders. There are three types of events that affect retained earnings: dividends, revenues, and expenses. Dividends decrease retained earnings Revenue increases retained earnings Expenses decrease retained earnings

Expenses

are the costs of selling goods or services. Expenses are the opposite of revenues and, therefore, decrease equity.

Examples of Assets

cash merchandise inventory furniture land Accounts Receivable

Assets

is an economic resource that is expected to benefit the business in the future. Assets are something of value that the business owns or has control of.