COURSE
:
ACC 232 - FINANCIAL ACCOUNTING I
CREDIT HOURS
:
3 CREDITS
SEMESTER/SESSION
:
2nd SEMESTER, 2024/2025 SESSION
PREPARED BY
:
ZEQUEL MICHAEL
STUDENT ID
:
998474209
REFERENCE
:
FINANCIAL ACCOUNTING by CHRISTINE JONICK, ED.D.
ASSET, LIABILITY AND STOCKHOLDERS’ EQUITY ACCOUNTS
The three additional categories of accounts—assets, liabilities, and stockholders'
equity—are detailed in a different financial statement known as the balance sheet. Unlike the
temporary accounts found on the income statement, these are classified as permanent accounts,
as they remain open and are not closed at the end of the accounting period. Instead, the account
balances for the items listed on the balance sheet at the end of a period are carried forward and
serve as the starting balances for the beginning of the next period.
Assets
Assets refer to items that hold value for a company, encompassing all the resources the
company has to maintain operations. These assets are logged in the financial records at the
price the company incurred or what was disbursed to obtain them. This concept is referred to
as the cost principle.
The initial two asset categories are ones you are already acquainted with. These are
current assets, indicating that they involve cash or can be converted into cash within a year's
time frame.
Cash The currency that a company currently has. Accounts Receivable The total
amount that clients owe to a company due to invoicing on credit.
The subsequent assets classified are fixed assets. These tend to be significantly costly
and have a lifespan exceeding one accounting year. Thus, they are categorized as assets instead
of expenses, which pertain to costs assigned to a specific accounting period.
1. Land : The property owned by a business
2. Building : The real estate space owned by a business
3. Truck : The vehicle owned by a business
4. Equipment : The electronic devices owned by a business
5. Furnishings : The furniture owned by a business
Liabilities
Liabilities represent the debts that a business incurs in relation to its assets. They are
essentially claims against those assets made by individuals or entities that do not have
ownership in the business.
There are several types of liability accounts, including:
COURSE
:
ACC 232 - FINANCIAL ACCOUNTING I
CREDIT HOURS
:
3 CREDITS
SEMESTER/SESSION
:
2nd SEMESTER, 2024/2025 SESSION
PREPARED BY
:
ZEQUEL MICHAEL
STUDENT ID
:
998474209
REFERENCE
:
FINANCIAL ACCOUNTING by CHRISTINE JONICK, ED.D.
1. Accounts Payable: This refers to the amounts a business owes to its vendors for
goods or services received but not yet paid for, typically on credit.
2. Note Payable: This is a loan taken for cash or against owned assets, usually
documented through a formal agreement.
3. ANY Payable: This represents debt owed for a specific purpose.
Both Accounts Payable and Notes Payable fall under the category of liabilities or debts;
however, they serve different functions. Accounts Payable reflects an agreement with a vendor,
allowing the business time—often thirty days—to settle the payment for products or services
acquired. On the other hand, a Note Payable involves a formal, signed loan agreement that
generally specifies an interest rate and outlines the terms and conditions for repayment over
time.
Stockholders’ Equity
Stockholders' equity represents the ownership stake of shareholders in a business's
assets, essentially reflecting their claim on those assets. A corporation is a distinct legal entity,
separate from its owners, who are known as stockholders. These stockholders receive shares
as proof of their investment in the corporation. One of the key advantages of this business
structure is limited liability; stockholders can only lose the amount they have invested in the
corporation, with their personal assets protected from any claims that may arise against the
company.
The accounts that make up stockholders' equity include:
1. Common Stock Account: This account reflects the value of shares that have
been issued to stockholders.
2. Retained Earnings Account: This account accumulates the corporation's profits,
effectively "storing" the earnings that are not distributed to shareholders.
3. Cash Dividends: This refers to the payouts of profits (from retained earnings)
that are distributed to stockholders.
Stockholders' equity represents the portion of a company's total assets that belongs to
its stockholders. This category includes only two accounts: Common Stock and Retained
Earnings.
Common stock reflects the ownership share of the business that comes from outside
investors who inject their own capital into the company. In contrast, retained earnings represent
the internal ownership value created by the business’s profits, which are ultimately shared
among the stockholders.
Cash dividends are distributions of these profits from retained earnings to stockholders.
This account, known as Cash Dividends, temporarily replaces a debit in Retained Earnings and
is classified as a contra stockholders' equity account. As a result, cash dividends decrease the
balance of Retained Earnings. At the end of the accounting period, the balance in Cash
Dividends is closed out and transferred to Retained Earnings, completing the process.
COURSE
:
ACC 232 - FINANCIAL ACCOUNTING I
CREDIT HOURS
:
3 CREDITS
SEMESTER/SESSION
:
2nd SEMESTER, 2024/2025 SESSION
PREPARED BY
:
ZEQUEL MICHAEL
STUDENT ID
:
998474209
REFERENCE
:
FINANCIAL ACCOUNTING by CHRISTINE JONICK, ED.D.
Sole Proprietorship VS Corporation
Imagine you decide to start a lawn care business, investing $500 of your own money
and purchasing $1,500 worth of lawnmowers, bringing your total investment to $2,000. If you
choose not to incorporate, your business functions as a sole proprietorship. On the other hand,
if you do decide to incorporate, your business becomes a corporation.
To set up a corporation, you must file a document known as articles of incorporation
with the state in which you intend to operate, along with a designated fee. Once this paperwork
is submitted and approved, the state grants your business corporate status.
Now, consider this scenario: if you accidentally damage a customer’s property and they
submit a claim against you for $10,000, your liability as a corporation is limited to the amount
you have invested and earned in the business. Conversely, as a sole proprietorship, you could
potentially be responsible for more than your total investment. In this case, you would have to
cover the difference using your personal finances. If your personal funds are insufficient, you
might even find yourself in a situation where you have to sell personal belongings or make
deductions from your future income to settle the claim. Therefore, without the protection of
corporate status, your financial risk extends beyond what you invested in the business.
