Effect of transactions on accounts

Retained Earnings

Cumulative net income of a corporation that has not been distributed as dividends. Retained Earnings represents a corporation's capital that has been earned through profitable operations. Future profits, if not distributed as dividends, will add to the amount of retained earnings. Net loss and dividend distribution will reduce the balance of retained earnings. The Retained Earnings account is used to keep track of changes to retained earnings; its balance reflects the ending balance on the retained earnings statement, which also appears on the balance sheet under stockholders' equity.

Dividends

Distribution of retained earnings (profit) to the stockholders, the owners of a corporation. In order for a corporation to pay dividends, it usually must have adequate retained earnings as well as cash in the bank, since dividends are typically paid in cash. The management of a corporation decides if and when to pay dividends. Dividends are normally declared by the corporate board of directors and are paid to stockholders based on the number of shares owned.

Issuing Stock

In return for investment in a corporation, the corporation issues to investors, stock certificates to be held by the investors (stockholders) as evidence of their ownership interest in the corporation. A stock certificate is issued in the name of the investor and specifies the number of shares issued to that investor. A stock certificate can be issued for any number of shares. The total number of shares issued by a corporation to all investors is equal to, or less than, the number authorized by its charter in the articles of incorporation. The number of shares issued to investors is called shares outstanding, and the amount invested is called the contributed capital, or capital stock.

At the end of the month, we record the supplies that have been used throughout the period.

Supplies - decreased Retained earnings - decreased

Equity

The owners' claim to the assets of their business after deducting liabilities. For a sole proprietorship, equity is called capital, or owner's equity. For a corporation equity is called stockholders' equity and is comprised of the balances of common stock and retained earnings (for a corporation with a simple capital structure). Equity is reported on the balance sheet, following liabilities. Sole proprietorship: Assets = Liabilities + Owner's equity Corporation: Assets = Liabilities + Stockholders' equity

Supplies

A current assets account used for recording the cost of supplies purchased for future use by the business. Supplies may include office supplies, art supplies, or advertising supplies, depending on the nature of the business, and the supplies are typically used within the current period. Cost includes the purchase price of the supplies, sales taxes, and shipping costs. The Supplies account is adjusted (reduced) at year-end by the amount used. The remaining balance is verified by a physical count and reported on the balance sheet as a current asset.

Equipment

A fixed asset (plant asset) account used for recording the cost of equipment purchased for use by the business. The asset's costs include the purchase price of the equipment, sales taxes, broker's commission, freight costs, and insurance costs during shipping, as well as the costs of installation and special training needed to ready the asset for its intended use. Since equipment is purchased for use in the business, and the life of the asset is usually longer than one year, the matching principle requires that its cost be allocated to the periods benefiting from its use. This process of expensing the acquisition cost over the estimated useful life is called depreciation. Equipment is reported at book value, cost less accumulated depreciation, under the property, plant, and equipment section of the balance sheet. Equipment is depreciated in a systematic and rational manner over the estimated useful life of the asset.

Accounts Payable

A liability account created by a purchase of goods or services on credit.

Paid off accounts payable.

Cash - decreased Accounts Payable - decreased

Paid employee's monthly salaries for the current month.

Cash - decreased Retained Earnings - Decreased

Paid rent on office space for current month.

Cash - decreased Retained earnings- decreased (expense)

Collected receivables on account.

Cash - increased Accounts Receivable - decreased

Prepaid Expenses (Deferred Expenses)

Advance payments for services and supplies, which at the time of the purchase were recorded as increases to assets in keeping with the accrual basis of accounting, e.g. Prepaid Insurance, Prepaid Rent, and Supplies. At the end of the period, the asset is expensed (reduced) by the amount that has been used up, or incurred. The expense account is increased by the same amount. Also called Prepaid Expenses

Capital Stock

Also Capital Stock Account. A corporation's capital as represented by the total number of shares, on the stock certificates, it issued to its investors in return for their investment. See Issuing Stock for more details.

Accounts Receivable

Also called Trade Receivables. Amounts due from customers from the sale of goods or services on account. Receivables are reported on the balance sheet as current assets and normally constitute the largest type of claim (receivable) held by a company. These amounts are usually due to be received in cash in thirty to sixty days. Accounts Receivable is debited (increased) when a sale on account of goods or services is made. When a payment is received from a customer on account, Accounts Receivable is credited (decreased). Accounts Receivable is also credited (decreased) by write-offs of uncollectible accounts.

Cash

An asset that includes currency (paper money and coins), checks, and money orders as well as deposits in bank accounts and other financial institutions. For bank deposits to be considered cash, these deposits must be available for unrestricted withdrawal and use. Cash is the most liquid asset, and as such it is reported on the balance sheet as the first account among current assets. Some entities report cash and cash equivalents together. Cash is also reported on the statement of cash flows. Sound principles of internal control require that cash receipts be deposited at least once every day. Also, except for minor disbursements handled through a petty cash fund, all cash payments should be made by check. The cash account is reconciled monthly to the bank statement.

Transaction

An event that affects the financial position of a business and causes an increase or decrease in individual asset, liability, or retained earnings (owner's equity) accounts. Transactions are recorded initially in a journal.