The Accounting Equation: Assets = Liabilities + Stockholder’s Equity (always needs to be
balanced)
Asset =A resource that the business owns or has the right to use. (prepaid expense, cash,
AR, land, supplies, equipment, etc.)
Liability =An obligation to another party ( i.e. amount owed to a lender or other creditor;
AP, notes payable, unearned/deferred revenue)
Stockholders’ Equity = Stockholders’ claims to the company’s resources (the value of
Stockholders’ interest)
oStockholders’ Equity = Common Stock + Retained Earnings
oCommon Stock = Owners’ investments
oRetained Earnings = Accumulation of all prior period’s Net Income not yet paid to
owners. =
ΣNet Income−ΣDividends
Transactions are consolidated in Financial Statements
oThe Income Statement : details Revenues and Expenses and resulting Net Income over a
period of time. How do you determine Net Income?
Net Income = Revenue – Expenses (if revenue is more than expenses, we
have net income; if expenses is more than revenue we have a net loss.)
Dividends have no effect on net income.
oThe Statement of Retained Earnings : Details the Net Income and Dividends paid to owners
over a period of time. Retained Earnings = ∑NI - ∑Dividends
What does the statement of retained earnings look like?
Retained Earnings Beginning Balance
+ Net Income
- Dividends
= Retained Earnings Ending Balance
oThe Balance Sheet : Provides balances in Assets, Liabilities, and Stockholders’ Equity at a
specific point in time. Provides the financial position, or how is the company financed? i.e.
What combination of Debt and Equity?
General Journal: just a list of journal entries.
General Ledger: list all transactions/accounts with the detailed transaction that affected each
account along with a running balance in the account. (revenue, expense)
Trial Balance: list of all accounts with a current balance at that point in time; create at the end of
the period, before we finalize; usually can compare to last years.
Recording Transactions:
•What are the accounts affected
•What type of account is it: Asset, Liability, Owners’ Equity, Revenue, Expense.
What is financial Accounting?
•Should the account be increased or decreased (DR/CR)?
•Based on the type of account and whether it should be increased or decreased should you
debit or credit the account?
•Example journal entries you should know-
•Your company sells stock to investors for cash
•DR Cash $XX CR Common Stock $XX (assets up, SE up)
•Your company obtains a loan from the bank by signing a note.
•DR Cash $XX CR Notes Payable $XX (assets up, liabilities up)
•Your company purchases machinery using cash/or credit.
•DR Machinery $XX CR Cash $XX (assets up, assets down)
•Your company sells a good for cash.
•DR Cash $XX CR Revenue $XX (assets up, SE up)
•Employees work for you and you pay them cash in the same month.
•DR Wages Expense $XX CR Cash $XX (assets down, SE down)
•Liabilities = $150 million & SE = $300 million. What are assets? $450 million.
•Liabilities decrease by $100 million & SE increase by $150 million. Did assets
increase/decrease and by how much?
•Assets = -100m + $150m = increase of $50 million.
•Pay cash dividends
•DR Dividends $XX CR Cash $XX (assets down, SE down)
Types of Adjusting Entries:
•Accruals - Cash has not changed hands but revenue has been earned or an expense has
been incurred so need to record revenue or expense in the current period.
•Accrued revenue-A customer has purchased $3,000 of goods from you on credit.
•DR Accounts Receivable $3,000 (assets up)
•CR Revenue $3,000 (SE up)
•What is the journal entry when the customer pays?
•DR Cash $3,000 CR AR $3,000 (assets up, assets down, zero
effect)
•Accrued expense-You received a utility bill for $200 that isn’t due until the
following month.
•DR Utilities Expense $200
•CR Accounts Payable $200
•What is the journal entry when you pay for the utility bill?
•DR Accounts Payable $200 CR Cash $200 (assets down, liabilities
down)
•Purchased supplies for $1,200 in December 2016.
•DR Supplies $1,200 CR Cash $1,200
•If you use $750 of the supplies in January 2017 what is the journal entry to record
the expense or use of the paper in January?
•DR Supplies Expense $750
•CR Supplies $750
•What if instead you count inventory at the end of January and find that you have
$500 worth of supplies left.
•$1,200 - $500=$700
•DR Supplies Expense $700
•CR Supplies $700
•Deferrals - Cash changes hands today but revenue hasn’t been earned or expense hasn’t
been incurred so need to defer recognizing revenue or expense until later.
•Deferred expense-you’ve prepaid $12,000 for insurance for the entire year.
•DR Prepaid Insurance $12,000
•CR Cash $12,000
•What is the journal entry as the company receives/uses the insurance?
•DR Insurance Expense $12,000 CR Prepaid Insurance $12,000
•Deferred revenue-You’ve received $24,000 in cash from a customer who is
paying for services you will provide in the following year.
•DR Cash $24,000
•CR Deferred (Unearned) Revenue $24,000 (assets up, liabilities
up)
•What is the journal entry as the company earns revenue (provides the
service)?
•DR Deferred (Unearned) Revenue $24,000 CR Revenue $24,000
•Be able to read a T-Account
•Expenses, DR balances
•Record Closing journal entry
•DR Revenues
•CR Expenses
•CR Retained Earnings if there is Net Income/DR Retained Earnings if there is a
Net Loss
•$100,000 in revenue (always credit) and $25,000 in expenses (always debit).
•So, to zero out…
•DR Revenues $100,000 CR Retained Earnings $100,000 (close out
revenues)
•DR Retained Earnings $25,000 CR Expenses $25,000 (close out expenses)
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