ACCT 2301 1st edition Final Exam Study Guide Accounting Equation The accounting system reflects two basic aspects of a company What it owns and what it owes Assets are resources a company owns or controls Liabilities are what a company owes its non owners creditors in future payments products or services Equity also called owner s equity or capital refers to the claims of its owner s Together liabilities and equity are the source of funds to acquire assets The relation of assets liabilities and equity is reflected in the following accounting equation Assets Liabilities Equity Assets are resources a company owns or controls Examples are web servers for an online service company musical instruments for a rock band and land for a vegetable grower Liabilities are creditors claims and assets These claims reflect company obligations to provide assets products or services to others The term payable refers to a liability that promises a future outflow of resources Examples are wages payable to workers accounts payable to suppliers note payable to banks and taxes payable to the government Equity is the owner s claim on assets and is equal to the assets and liabilities This is the reason equity is also called net assets or residual equity A corporation s equity often called stockholders or shareholders equity has two parts contributed capital and retained earnings Contributed Capital refers to the amount that stockholders invest in the company included under the title common stock Retained Earnings refer to the income revenues less expense that has not been distributed to its stockholders The distributions of assets to stockholders are called dividends which reduce retained earnings Revenues increase retained earnings via net income and are resources generated from a company s earnings activities Examples are consulting services provided sales of products facilities rented to others and commissions from services Expenses decrease retained earnings and are cost of assets or services used to earn revenues Examples are cost of employee time use of supplies and advertising utilities and insurance services from others This breakdown of equity yields the following expanded accounting equation Transactions Analysis External Transactions Are exchanges of value between two entities which yeld changes in the accounting equation Internal Transactions Are exchanges between an entity which may or may not affect the accounting equation Investment by Owner Purchase Supplies for Cash Purchase Equipment for Cash Purchase Supplies for Credit Provide Services for Cash Payment of Expenses in Cash Provide Services and Facilities for Credit Receipt of Cash from Accounts Receivable Payment of Accounts Payable Payment of Cash Dividends Summary of Transactions The Account and Its Analysis Adjusting Accounts and Preparing Financial Statements Recognizing Revenues and Expenses Current Lecture
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