The Accounting Equation 1 Assets Claims 2 Claims on the assets are from three sources a Creditors liabilities b c Operations profit Investors stockholders equity Basic accounting Equation 1 Assets liabilities Owners Stockholders equity a Assets what is owned by the company Economic resources are used to produce revenue that is expected to provide future benefits to businesses Examples computers buildings cash land trucks supplies office furniture Accounts receivable b Liabilities what we owe c Stockholders Equity Obligations of a business to relinquish assets provide services and accept other obligations Examples notes payable utilities payable accounts payable The portion of assets that stockholders own Paid in capital Retained earnings 1 revenues gains Expenses Losses 2 3 dividends not on the income statement i ii iii i ii i ii iii iv Examples Operating expenses Rent revenue Utility expense gasoline Expense Retained Earnings salaries expenses Common Stock Servicerevenue Interest Expense Dividends and supplies expenses 2 Economic Entity Assumption a The activities of the entity are to be kept separate from the activities of its owner and all other economic activities Asset Accounts what the company owes 1 Cash a Most Important b Greatest control Opportunity for fraud 2 Accounts Receivable a Process of paying back b Ex credit card c Ex 2 amazon order that charges ONCE IT SHIPS a Loaned someone money you need to pay them back a Prepaid rent ex security deposit that is paid upfront 3 Notes Receivable 4 Prepaid Accounts 5 Supplies 6 Equipment 7 Buildings 8 Land business 2 Notes Payable 3 Unearned Revenue 4 Accrued Liabilities Liability Accounts what a company owes to its creditors 1 Accounts Payable a Can be products OR supplies b Gets invoice after shipment to pay back electronic or paper a product to a i Ex Lulu pays back supplier after selling items 30 days a Getting paid upfront before doing something Stockholder Equity Accounts Owner s Claim on Company Assets 1 2 3 4 Common Stock Dividends Retained Earnings Revenues Expenses Retained Earnings Earned Capital 1 Retained earnings represent a company s accumulated undistributed net income or net loss 2 REVENUE EXPENSES NET INCOME a Retain and use to generate additional assets for the benefit of stockholders b Distribute all or a portion back to stockholders dividend c Can use retained earnings to put back into the business grow Net Income 1 REVENUE EXPENSES NET INCOME 2 Revenues sales of goods or services 3 Expenses costs necessary to earn revenues ex wage utilities advertising etc 4 Matching principle expenses should be reported in the same period in which corresponding revenue is earned Important Vocab 1 Investors Company or individual who gives assets 2 Managerial Accounting branch of accounting that provides information useful to internal decision makers and managers in operating an organization 3 Profit Value added by transforming resources into products or services desired by customers 4 Expenses Economic sacrifices decrease in assets or increase in liabilities that are incurred in the process of generating revenue 5 Common Stock basic claims of corporate stock that carry no preferences as to claims on assets on dividends certificates that evidence ownership in a company 6 Creditors Individuals or institutions that have loaned goods or services to a business 7 Balance Sheet Statement that lists the assets of a business and the corresponding claims liabilities and equity on those assets