ADM 1340 Lecture Notes - Lecture 3: Retained Earnings, Current Liability, Accounting Equation
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| Assets | = | Liabilities + Equity |
| The left side of the accounting equation shows the economic resources of the company (what the company has). | = | The right side of the accounting equation summarizes who provided those assets: Creditors or the owners. |
When a business is first formed, both sides of the equation are equal to zero. As transactions occur, they affect the accounting equation, but the accounting equation must always stay in balance. A transaction can increase both sides or decrease both sides. A transaction could also affect only one side by increasing and decreasing one side at the same time.
APPLYING THE CONCEPTS: Analyzing Changes to Assets, Liabilities and Equity
Thomas Company: The table below demonstrates the effect of the first three transactions for Thomas Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers. If an updated balance is zero, enter "0".
| Transaction | Assets | = | Liabilities | + | Equity |
| Beginning | $0 | = | $0 | + | $0 |
| Investment in the Business The owner of the company has invested $26,000 cash into the business. This increases the assets of the business from its zero balance. The owner has a claim on the assets, so equity also increases from its zero balance. Make sure the equation stays in balance. | $ | = | $ | + | $ |
| Borrow Cash The company borrows $13,000 cash from the local bank. This increases the assets from its balance after the first transaction. The company now owes the bank; therefore, the bank also has a claim on the assets. Thus, liabilities increase from their zero balance. Notice this transaction did not affect equity. The equation still needs to balance. | $ | = | $ | + | $ |
| Purchase equipment The company pays cash for a piece of equipment costing $10,000. Make sure that the equation stays in balance. Remember, the left side of the equation summarizes the total assets. The company has merely exchanged one asset (cash) for another asset (equipment); the value of each asset is the same. | $ | = | $ | + | $ |
Jones Company: Analyze the accounting equation for another business, Jones Company. Assume that the assets are $66,000 and the liabilities are $26,400. By rearranging the accounting equation, you determine that equity is $.
During the year, the owner invested an additional $4,000 in the business. The company also paid off $2,500 of its debt. What would the accounting equation look like at the end of the year for Jones Company? Enter the updated amounts for Jones' accounting equation below.
| Assets | = | Liabilities | + | Equity |
| $ | = | $ | + | $ |
APPLYING THE CONCEPTS: Analyzing the Effect of Revenues and Expenses
The equity component of the accounting equation can be affected by more than owner contributions. In any form of business, the owners take all revenues and expenses. Therefore, equity increases for revenue earned and decreases for expenses incurred. Also in any form of business, money can be distributed from the business to the owners. Distributions (in the form of cash or other assets) to the owner decrease the equity account. Smith Company had transactions affecting equity during the past year. The table below demonstrates the effect of these transactions for Smith Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers.
| Transaction | Assets | = | Liabilities | + | Equity |
| Beginning of the year | $320,000 | = | $96,000 | + | $224,000 |
| Revenues earned: During the year, Smith Company earned revenues totalling $192,000. The cash has been collected from the customers for all revenue earned this year. | $ | = | $ | + | $ |
| Expenses incurred: Smith Company incurred expenses totalling $134,400 during that same year. All of the expenses incurred this year were paid in cash. | $ | = | $ | + | $ |
| Distributions: At the end of each quarter, the owner withdraws cash from Smith Company. The sum of those quarterly distributions was $5,760. | $ | = | $ | + | $ |
APPLYING THE CONCEPTS: Putting it all together
Letâs put all the pieces together now. Suppose that you are analyzing Martin Company. You know that at the beginning of the year, the assets equaled $320,000 and the liabilities equaled $176,000. During the year, assets increased by $48,000 and equity increased by $74,400. The change in equity includes all increases and decreases. Further analysis reveals that the changes in equity were caused by revenues of $172,800 and expenses totaling $112,320 during the year, and additional ownersâ investments of $50,400 in the first half of the year. Because of your understanding of the accounting equation, you realize that distributions (withdrawals) to the owner must have also occurred during the year. However, you must determine the amountfor those distributions.
What is the amount of distributions made to the owner of Martin Company during the year? $
Complete the equation below with amounts for the end of the year.
| Assets | = | Liabilities | + | Equity |
| $ | = | $ | + | $ |
NEED ASAP PLEASE
Question 1
Which one of the following is not an externaluser of accounting information?
Customers | ||
Investors | ||
Regulatory agencies | ||
All of these are external users |
3 points
Question 2
The first step in solving an ethical dilemma is to
identify and analyze the principal elements in thesituation. | ||
identify the alternatives. | ||
recognize an ethical situation and the ethical issuesinvolved. | ||
weigh the impact of each alternative on variousstakeholders. |
3 points
Question 3
Generally accepted accounting principles are
income tax regulations of the Internal Revenue Service. | ||
standards that indicate how to report economic events. | ||
theories that are based on physical laws of the universe. | ||
principles that have been proven correct by academicresearchers. |
3 points
Question 4
Which of the following events is not a businesstransaction?
Issuance of stock in exchange for cash. | ||
Hired employees. | ||
Incurred utility expenses for the month. | ||
Earned revenue for services provided. |
3 points
Question 5
When assets are distributed to the owners of a corporation,these distributions are termed
depletions. | ||
consumptions. | ||
dividends. | ||
a credit line. |
3 points
Question 6
If total liabilities increased by $8,000, then
assets must have decreased by $8,000. | ||
stockholders' equity must have increased by $8,000. | ||
assets must have increased by $8,000, or stockholders' equitymust have decreased by $8,000. | ||
assets and stockholders' equity each increased by $4,000. |
3 points
Question 7
If total liabilities increased by $30,000 and stockholders'equity increased by $20,000 during a period of time, then totalassets must change by what amount and direction during that sameperiod?
$50,000 decrease | ||
$10,000 decrease | ||
$10,000 increase | ||
$50,000 increase |
3 points
Question 8
Misra Company compiled the following financial information as ofDecember 31:
Revenues | $ 340,000 |
Retained Earnings, Beginning | $ 60,000 |
Equipment | $ 80,000 |
Expenses | $ 250,000 |
Cash | $ 90,000 |
Dividends | $ 20,000 |
Supplies | $ 10,000 |
Accounts payable | $ 40,000 |
Accounts receivable | $ 70,000 |
Common Stock | $ 80,000 |
Misra's assets on December 31 are
$180,000. | ||
$250,000. | ||
$360,000. | ||
$ 490,000. |
3 points
Question 9
Mofro's Computer Repair Shop started the year with total assetsof $300,000 and total liabilities of $200,000. During the year, thebusiness recorded $500,000 in computer repair revenues, $300,000 inexpenses, and Mofro paid dividends of $50,000. Stockholders' equityat the end of the year was
$200,000. | ||
$100,000. | ||
$250,000. | ||
$300,000. |
3 points
Question 10
A balance sheet shows
assets, liabilities, and stockholders' equity. | ||
expenses, dividends, and stockholders' equity. | ||
revenues, expenses, and dividends. | ||
revenues, liabilities, and stockholders' equity. |
3 points
Question 11
At September 1, Foli Co. reported retained earnings of $136,000.During the month, Foli generated revenues of $20,000, incurredexpenses of $12,000, purchased equipment for $5,000 and paiddividends of $2,000. What is the amount of retained earnings atSeptember 30?
$136,000 | ||
$142,000 | ||
$8,000 | ||
$137,000 |
3 points
Question 12
Grayton Industries purchased supplies for $1,000. The Companypaid $500 in cash and agreed to pay the balance in 30 days. Thejournal entry to record this transaction would include a debit toan asset account for $1,000, a credit to a liability account for$500. Which of the following would be the correct way to completethe recording of the transaction?
Credit an asset account for $500. | ||
Credit the Retained Earnings account for $500. | ||
Credit another liability account for $500. | ||
Debit the Retained Earnings account for $500. |
3 points
Question 13
Radio Moscow Industries purchased supplies for $1,000. They paid$400 in cash and agreed to pay the balance in 30 days. The journalentry to record this transaction would include a debit to an assetaccount for $1,000, a credit to a liability account for $600. Whichof the following would be the correct way to complete the recordingof the transaction?
Credit an asset account for $400. | ||
Credit another liability account for $400. | ||
Credit the retained earnings account for $400. | ||
Debit the retained earnings account for $400. |
3 points
Question 14
A credit to a liability account
must be accompanied by a debit to an asset account. | ||
indicates an increase in the amount owed to creditors. | ||
is an error. | ||
indicates a decrease in the amount owed to creditors. |
3 points
Question 15
In recording business transactions, evidence that an accountingtransaction has taken place is obtained from
business documents. | ||
the Internal Revenue Service. | ||
the public relations department. | ||
the SEC. |
3 points
Question 16
On June 1, Leno Inc. buys a copier machine for her business andfinances this purchase with cash and a note. When journalizing thistransaction, the company's accountant will
make a simple entry. | ||
use two journal entries. | ||
make a compound entry. | ||
list the credit entries first, which is proper form for thistype of transaction. |
3 points
Question 17
A three column form of account is so named because it hascolumns for
debit, credit, and balance. | ||
debit, credit, and date. | ||
debit, credit, and account name. | ||
debit, credit, and reference. |
3 points
Question 18
The first step in designing a computerized accounting system isthe creation of the
general ledger. | ||
general journal. | ||
trial balance. | ||
chart of accounts. |
3 points
Question 19
Chik Chik Company showed the following balances at the end ofits first year:
Cash | $ 6,000 |
Prepaid insurance | $ 9,400 |
Accounts receivable | $ 7,000 |
Accounts payable | $ 5,600 |
Notes payable | $ 8,400 |
Common stock | $ 2,800 |
Dividends | $ 1,400 |
Revenues | $ 44,000 |
Expenses | $ 35,000 |
What did Chik Chik Company show as total credits on its trialbalance?
$51,400 | ||
$60,800 | ||
$62,200 | ||
$70,200 |
3 points
Question 20
Which of the following time periods would notbe referred to as an interim period?
Monthly | ||
Quarterly | ||
Semi-annually | ||
Annually |