Accounting Principles 14th Edition Jerry J. Weygandt, Paul D. Kimmel, Jill E. Mitchell
___________________________________________________________________________________________________________________
Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
Accounting is based on a simple concept:
What is OWNED (assets) must equal what is OWED to creditors (liabilities) and to OWNERS (stockholders' equity);
Applies to ALL economic entities
Account
a record of increases and decreases in a specific asset, liability, or stockholders' equity item
Asset
Something of value owned by an entity; economic resources that are owned by the business and used in the business hopefully to produce a profit.
Examples:
-Cash
-Accounts Receivable (assets, usually cash, which are expected to be RECEIVED in the future)
-Supplies
-Equipment
Assets ______________ when they are acquired or when the company sells goods or services to customers.
increase
Assets ___________ when they are used up in the form of expenses or when they are sold to someone else.
decrease
Liabilities
Debts and obligations of the company (what the company OWES)
Examples of Liabilities
-Accounts Payable (amount business expects to PAY in the future, usually with cash)
-Notes Payable
-Mortgage Payable
Liabilities ___________ when the company borrows money or when it charges something that it buys.
increase
Liabilities ______________ when the debt is paid off.
decrease
Creditor
The party to whom money is OWED is called a
Stockholders' equity
Owners' claim on total assets of the business.
Stockholders' equity consists of 2 components:
1) Common Stock
2) Retained Earnings
Common Stock (Stockholders' Equity)
Total amount paid in by stockholders for the shares of stock they purchase.
Retained Earnings (Stockholders' Equity)
Net income the company retains in the business; consists of 3 components:
1) Revenue
2) Expense
3) Dividends
Revenue (Retained Earnings)
An inflow of assets from the sale of goods or services to customers for the purpose of earning income;
Revenue is earned when a sale is made.
Assets generally INCREASE (either cash or accounts receivable) and stockholders' equity INCREASES.
Expense (Retained Earnings)
A cost of earning revenue and of being in business.
Expenses are created when the company uses up assets.
If the expense is paid in cash at the time it is incurred, assets DECREASE and stockholders' equity DECREASES.
If an expense is incurred but instead of paying cash at the time of the use, the company charges it, then liabilities INCREASE and stockholders' equity DECREASES.
Dividends (Retained Earnings)
Distribution of cash or other assets to stockholders.
Dividends REDUCE stockholders' equity but are NOT considered expenses.
Net income
, results when revenues are GREATER than expenses.
Net loss
results when expenses are GREATER than revenues.
Using the Accounting Equation:
Each transaction that happens to a company must be analyzed to determine its effect on the accounting equation.
The effects of all transactions will be reflected in the accounting equation.
Since this is an equation, every transaction must have at least 2 effects on the equation in order to remain in balance. (A transaction may have more than 2 effects on the equation, but must have a minimum of 2).
Financial Statements
An accountant's way of communicating the financial information of a company to the interested users.
4 Basic Financial Statements:
1) Income Statement
2) Retained Earnings Statement
3) Balance Sheet
4) Statement of Cash Flows
Income Statement
Summarizes the revenues and expenses and the resulting net income or loss (Revenues - Expenses) over a specific period of time.
Revenues - Expenses = Net Income (Net Loss)
Retained Earnings Statement
Summarizes the changes in retained earnings over a specific period of time.
Beg. Retained Earnings + Net Income (or - Net Loss) - Dividends = Ending Retained Earnings
Balance Sheet
A financial statement that reports the assets, liabilities, & stockholders' equity of a company at a specific date; proves that the accounting equation is still in balance.
Assets = Liabilities + Stockholders' Equity
Statement of Cash Flows
Summarizes information about the cash inflows (receipts) and outflows (payments) of a company over a specific period of time.
Debit
Left side of an account;
INCREASE to:
-Assets
-Expenses
-Dividends
DECREASE to:
-Liabilities
-Stockholders' equity
-Revenues
Credit
RIGHT side of an account;
DECREASE to:
-Assets
-Expenses
-Dividends
INCREASE to:
-Liabilities
-Stockholders' equity
-Revenues
Debits MUST equal credits
In order to have a balanced journal entry, the total of the debits in the entry must equal the total of the credits in that entry.
"DEAD"
Debits
increase:
Expenses
Assets
Dividends
-When expenses, assets, & dividends are debited, their account balances increase (therefore a CREDIT to these accounts DECREASES their account balances).
-Other account types (liabilities, common stock, retained earnings, & revenues) INCREASE with a CREDIT & therefore DECREASE with a debit.
Normal Balance
The side of the account which INCREASE the account balance.
Example of a Normal Balance:
Since Cash is an asset, it INCREASES with a debit, therefore it has a "normal debit balance" (meaning debits INCREASE that account's balance).
On the other hand, Revenue INCREASES with a credit, therefore it has a "normal credit balance."
To successfully prepare journal entries, you must learn the normal balance for EACH account. This is made easier by remembering the acronym "DEAD" and knowing how to utilize it!!***
Recording Process
___________________________________________________________________________________________________________________
Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
Accounting is based on a simple concept:
What is OWNED (assets) must equal what is OWED to creditors (liabilities) and to OWNERS (stockholders' equity);
Applies to ALL economic entities
Account
a record of increases and decreases in a specific asset, liability, or stockholders' equity item
Asset
Something of value owned by an entity; economic resources that are owned by the business and used in the business hopefully to produce a profit.
Examples:
-Cash
-Accounts Receivable (assets, usually cash, which are expected to be RECEIVED in the future)
-Supplies
-Equipment
Assets ______________ when they are acquired or when the company sells goods or services to customers.
increase
Assets ___________ when they are used up in the form of expenses or when they are sold to someone else.
decrease
Liabilities
Debts and obligations of the company (what the company OWES)
Examples of Liabilities
-Accounts Payable (amount business expects to PAY in the future, usually with cash)
-Notes Payable
-Mortgage Payable
Liabilities ___________ when the company borrows money or when it charges something that it buys.
increase
Liabilities ______________ when the debt is paid off.
decrease
Creditor
The party to whom money is OWED is called a
Stockholders' equity
Owners' claim on total assets of the business.
Stockholders' equity consists of 2 components:
1) Common Stock
2) Retained Earnings
Common Stock (Stockholders' Equity)
Total amount paid in by stockholders for the shares of stock they purchase.
Retained Earnings (Stockholders' Equity)
Net income the company retains in the business; consists of 3 components:
1) Revenue
2) Expense
3) Dividends
Revenue (Retained Earnings)
An inflow of assets from the sale of goods or services to customers for the purpose of earning income;
Revenue is earned when a sale is made.
Assets generally INCREASE (either cash or accounts receivable) and stockholders' equity INCREASES.
Expense (Retained Earnings)
A cost of earning revenue and of being in business.
Expenses are created when the company uses up assets.
If the expense is paid in cash at the time it is incurred, assets DECREASE and stockholders' equity DECREASES.
If an expense is incurred but instead of paying cash at the time of the use, the company charges it, then liabilities INCREASE and stockholders' equity DECREASES.
Dividends (Retained Earnings)
Distribution of cash or other assets to stockholders.
Dividends REDUCE stockholders' equity but are NOT considered expenses.
Net income
, results when revenues are GREATER than expenses.
Net loss
results when expenses are GREATER than revenues.
Using the Accounting Equation:
Each transaction that happens to a company must be analyzed to determine its effect on the accounting equation.
The effects of all transactions will be reflected in the accounting equation.
Since this is an equation, every transaction must have at least 2 effects on the equation in order to remain in balance. (A transaction may have more than 2 effects on the equation, but must have a minimum of 2).
Financial Statements
An accountant's way of communicating the financial information of a company to the interested users.
4 Basic Financial Statements:
1) Income Statement
2) Retained Earnings Statement
3) Balance Sheet
4) Statement of Cash Flows
Income Statement
Summarizes the revenues and expenses and the resulting net income or loss (Revenues - Expenses) over a specific period of time.
Revenues - Expenses = Net Income (Net Loss)
Retained Earnings Statement
Summarizes the changes in retained earnings over a specific period of time.
Beg. Retained Earnings + Net Income (or - Net Loss) - Dividends = Ending Retained Earnings
Balance Sheet
A financial statement that reports the assets, liabilities, & stockholders' equity of a company at a specific date; proves that the accounting equation is still in balance.
Assets = Liabilities + Stockholders' Equity
Statement of Cash Flows
Summarizes information about the cash inflows (receipts) and outflows (payments) of a company over a specific period of time.
Debit
Left side of an account;
INCREASE to:
-Assets
-Expenses
-Dividends
DECREASE to:
-Liabilities
-Stockholders' equity
-Revenues
Credit
RIGHT side of an account;
DECREASE to:
-Assets
-Expenses
-Dividends
INCREASE to:
-Liabilities
-Stockholders' equity
-Revenues
Debits MUST equal credits
In order to have a balanced journal entry, the total of the debits in the entry must equal the total of the credits in that entry.
"DEAD"
Debits
increase:
Expenses
Assets
Dividends
-When expenses, assets, & dividends are debited, their account balances increase (therefore a CREDIT to these accounts DECREASES their account balances).
-Other account types (liabilities, common stock, retained earnings, & revenues) INCREASE with a CREDIT & therefore DECREASE with a debit.
Normal Balance
The side of the account which INCREASE the account balance.
Example of a Normal Balance:
Since Cash is an asset, it INCREASES with a debit, therefore it has a "normal debit balance" (meaning debits INCREASE that account's balance).
On the other hand, Revenue INCREASES with a credit, therefore it has a "normal credit balance."
To successfully prepare journal entries, you must learn the normal balance for EACH account. This is made easier by remembering the acronym "DEAD" and knowing how to utilize it!!***
Recording Process
