Acct 2301 1st Edition Lecture 4 Outline of Last Lecture I Introducing Accounting in Business cont Outline of Current Lecture II Analyzing and Recording Transactions Current Lecture 7 Effects of transactions on the basic accounting equation cont 3 An increase in assets resulting from rendition of goods or services to customers is called revenue Earning revenue can be an asset source transaction To illustrate the effect of a revenue transaction let s assume that Friends Company received 3 000 cash for services it provided to customers Note in the illustration below that both assets and retained earnings increase which is a characteristic of an asset source transaction Illustration 5 Effect of revenue transaction Equity Assets Beginning balance Effect of revenue Ending balance 7 000 3 000 10 000 Liabilities 2 000 2 000 Contributed Capital 5 000 5 000 Retained Earnings 0 3 000 3 000 4 Assets acquired through operating activities are called revenues Assets used in the process of generating revenues are called expenses Expenses decrease retained earnings These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Assume Friends Company used 1 000 in assets to earn the 3 000 see above in revenues This is an example of an asset use transaction Asset use transactions result in a decrease in an asset account and in one of the claim accounts liability or equity accounts The effect of an asset use transaction assets and claims decrease on the basic accounting equation is as follows Illustration 6 Effect of expense recognition Assets Beginning balance Effect of expenses Ending balance 10 000 1 000 9 000 Liabilities 2 000 2 000 Equity Contributed Retained Earnings Capital 5 000 3 000 1 000 5 000 2 000 Take a note of how decreases or negative amounts are shown in accounting records Instead of prefixing a minus sign a number is taken into parenthesis This is a common way of showing a decrease in accounting 5 If a business chooses to transfer part of its assets particularly its retained earnings to the owners the transfer is called distribution Assume Friends Company transfers 500 of assets to its owners This is an asset use transaction Illustration 7 Effect of cash distribution Assets Beginning balance Effect of distribution Ending balance Liabilitie s Equity Contribute Retained d Capital Earnings 9 000 2 000 5 000 2 000 500 500 8 500 2 000 5 000 1 500 Both distributions and expenses result in decreases in retained earnings and thus in equity The table below is a summary of the effects of the three asset source transactions events 1 through 3 and two asset use transactions events 4 and 5 Illustration 8 Summary of transaction effects Beginning balance Effect of contribution Effect of borrowing Effect of revenue Effect of expenses Effect of distribution Ending balance Asset s 0 Equity Liabilitie Contributed Retained s Capital Earnings 0 0 0 5 000 5 000 2 000 3 000 1 000 500 8 500 2 000 2 000 5 000 3 000 1 000 500 1 500
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