Acct 2301 1st Edition Lecture 4Outline of Last Lecture I. Introducing Accounting in Business(cont.)Outline of Current Lecture II. Analyzing and Recording Transactions Current Lecture7. 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 = Liabilities+ContributedCapital+RetainedEarningsBeginning balance $7,000 = $2,000 + $5,000 + $0Effect of revenue +3,000 = + + +3,000Ending balance $10,000 = $2,000 + $5,000 + $3,0004) 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 Equity Assets = Liabilities+ContributedCapital+RetainedEarningsBeginning balance $10,000 = $2,000 + $5,000 + $3,000Effect of expenses (1,000) = + + (1,000)Ending balance $9,000 = $2,000 + $5,000 + $2,000Take 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 Equity Assets =Liabilities+Contributed Capital+RetainedEarningsBeginning balance$9,000 = $2,000 + $5,000 + $2,000Effect of distribution(500) = + + (500)Ending balance $8,500 = $2,000 + $5,000 + $1,500Both 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 and5):Illustration 8: Summary of transaction effects Equity Assets=Liabilities+ContributedCapital+RetainedEarningsBeginning balance $0 = $0 + $0 + $0Effect of contribution+5,000 = + +5,000 + Effect of borrowing +2,000 = +2,000 + + Effect of revenue +3,000 = + + +3,000Effect of expenses (1,000) = + + (1,000)Effect of distribution (500) = + + (500)Ending balance $8,500 = $2,000 + $5,000 +
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