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This chapter provides an overview of essential financial elements including assets, liabilities, and equity. It defines assets as economic resources expected to generate future cash inflows and provides examples such as cash, accounts receivable, and inventory. Liabilities are described as debts or obligations to outsiders, with examples including accounts payable and loans. The chapter also discusses shareholder equity, which reflects the owner's claim on assets post-liabilities. Fundamental accounting equations and the relationships between revenues and expenses are explored, demonstrating how transactions lead to financial statements like the income statement and balance sheet.
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Chapter 1, 2, 3 Review
Assets • Economic resources that are expected to generate future cash inflows or help reduce future cash outflows. • Things – touch them, feel them, see them
Examples of Assets • Cash • Accounts Receivable • Notes Receivable • Inventory • Office Supplies • Investments
Assets • Balance Sheet • Transactions • Debit side records increases • Credit side records decreases • Normal balance is debt
Liabilities • Debts • Economic obligations of the organization to outsiders, or claims against its assets by outsiders.
Examples of Liabilities • Accounts Payable • Notes Payable • Bank Loan Payable • Taxes Payable
Liabilities • Balance Sheet • Transactions • Credit side records increases • Debit side records decreases • Normal balance is credit
Equity • Owner’s claim to the assets after the liabilities have been satisfied. • Residual interest in the organization's assets after deducting liabilities. • Assets – Liabilities • How much of the assets the owner really owns.
Equity • Paid in Capital • Retained Earnings
Paid in Capital • Total capital investment by the corporation owners, both at the start of the corporation and thereafter. • Corporation sells shares.
Fundamental Accounting Equation • Also called Balance Sheet Equation • Assets = Liabilities + Shareholder’s Equity
Revenues • Sales of goods or services • Increase in shareholder’s equity arising from increase in assets received in trade for the delivery of goods or services to customers.
Examples of Revenues • Sales • Consulting Revenue • Computer Repair Revenue
Revenues • Income Statement • Transactions • Recorded on Debit side • Normal balance is Debit
Expenses • Outflows of assets that occur during a business’ operation. • Costs associated with generating revenue. • Using up of assets • Normal balance - Debit
Examples of Expenses • Salaries • Rent • Interest • Depreciation Expense • Cost of Goods Sold
Income Statement • Revenue : • Sales $100,000 • Expenses • Salaries $20,000 • Rent 10,000 • Depreciation 30,000 Net Income $50,000
Net Income • Revenues exceed expenses • Revenues greater than expenses • Revenue higher than expenses • More coming in than going out
Net Loss • Expenses exceed revenues • Expenses greater than revenues • Expenses higher than revenues • More going out than coming in
How does information get to the Financial Statements? • Transactions • Any event that both affects the financial position of an entity and can be reliably recorded in money terms. • Must affect 2 accounts or more.
Transactions • Analyze • What accounts are affected? • How much? • Asset, Liability, Revenue, Expense? • Increase or Decrease? • Debit or Credit?
Transactions • Record transaction in general journal. • EX: purchased $5,000 inventory on account. • DEBIT CREDIT • Inventory $5,000 • Accounts Payable $5,000 Purchased inventory
Posting • Transferring information from the general journal to the ledger. • Ledger is the place or location where we record the increased and decreases for each account.
Trial Balance • Listing of all accounts – taken from the ledger- and their balances. • DR=CR.
Financial Statements • Use information from Trial Balance to prepare: • Income Statement • Statement of Retained Income • Balance Sheet
