Chapter 1: Reporting About Resources (continued)
Financial Statements
The information provided by accounting systems is often communicated in the form of financial statements.
Three common financial statements are the income statement, statement of retained earnings, and balance sheet.
The information in the financial statements is useful in answering four common questions about companies.
What are the company's resources?
Where did the company get its resources?
What did management do with the company's resources?
What did the company do with the resources generated by management?
Income Statement
Prepare a financial report, called an income statement, designed to provide information to help answer the following question.
What did management do with the company's resources in August?
Income Statement
For the Month Ended August 31
Fees Revenue
Expenses
Supplies Expense
Net Income
Guitar Lessons Corporation
Income Statement
For the Month Ended August 31
Fees Revenue / $2,400
Expenses
Supplies Expense / $500
Net Income / $1,900
Fees revenue of $2,400 shows that management brought in $2,400 of resources by providing services to customers in August.
Supplies expense of $500 shows that management used up $500 of resources in providing services to customers in August.
Net income of $1,900 shows that management increased the company’s resources by $1,900 during the month of August.
Statement of Retained Earnings
Prepare a financial report, called a statement of retained earnings, designed to provide information to help answer the following question.
What did the company do with the resources generated by management in August?
Statement of Retained Earnings
For the Month Ended August 31
Balance, August 1 / $0
Plus: Net Income for August
Subtotal
Less: Dividends in August
Balance, August 31
Statement of Retained Earnings
For the Month Ended August 31
Balance, August 1 / $0
Plus: Net Income for August / $1,900
Subtotal / $1,900
Less: Dividends in August / $100
Balance, August 31 / $1,800
Dividends of $100 show that $100 of the company’s resources generated by management were distributed to owners during August.
The retained earnings balance of $1,800 shows that since the company was formed, the company’s management increased the company’s resources and $1,800 of the increased resources were still in the company on August 31.
Balance Sheet
Prepare a financial report, called a balance sheet, designed to provide information to help answer the following questions.
What are the company's resources on August 31?
Where did the company get its August 31 resources?
Balance Sheet
August 31
Assets
Cash
Accounts Receivable
Supplies
Total Assets
Liabilities
Accounts Payable
Total Liabilities
Stockholders' Equity
Common Stock
Retained Earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Guitar Lessons Corporation
Balance Sheet
August 31
Assets
Cash / $8,250
Accounts Receivable / $600
Supplies / $400
Total Assets / $9,250
Liabilities
Accounts Payable / $450
Total Liabilities / $450
Stockholders' Equity
Common Stock / $7,000
Retained Earnings / $1,800
Total Stockholders' Equity / $8,800
Total Liabilities and Stockholders' Equity / $9,250
Total assets of $9,250 show that the company’s resources were $9,250 on August 31.
Liabilities of $450 show that the company borrowed $450 of resources as of August 31.
Common stock of $7,000 shows that the company received $7,000 of resources from the owner as of August 31.
The retained earnings balance of $1,800 shows that since the company was formed, the company’s management increased the company’s resources and $1,800 of the increased resources were still in the company on August 31.
The Accounting Equation
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner
Invested
Resources / + / Sources of
Management
Generated
Resources
Using the terms assets, liabilities, and stockholders’ equity, restate the resources = sources of resources equation. The equation is commonly referred to as the accounting equation.
Define assets.
Assets are resources.
Identify two examples of assets.
Cash
Accounts receivable
Supplies
Buildings
Trucks
Define liabilities.
Liabilities are sources of borrowed resources.
Identify one example of a liability.
Accounts payable
Loans payable
Taxes payable
Define stockholders' equity.
Stockholders’ equity represents sources of owner-invested resources and management generated resources that are still in the company.
Give two examples of stockholders’ equity.
Common stock
Retained earnings
** You now have the background to do text exercises 1.5, 1.6, and 1.7.
Chapter 2: T Accounts, Debits, and Credits
State the accounting equation:
Assets = liabilities + stockholders' equity
Why is the accounting equation important?
When the accounting equation is in balance, the financial statements will be mathematically logical.
That is, the income statement will tie into the statement of retained earnings,
the statement of retained earnings will tie into the balance sheet,
and the balance sheet will balance.
** You now have the background to do text exercise 2.1.
Maintaining the Equality of the Accounting Equation: The double-entry system.
Using accounting terms, identify the two sides of the T account.
(Left side) / (Right side)
Debit / Credit
(Left side) / (Right side)
Using T Accounts: Guitar Lessons Corporation September transactions.
Receiving cash from customers: On September 2 the client serviced in August pays the company the $600 she owes. Show how this event affects the company's resources and sources of resources.
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
$9,250 / = / $450 / + / $7,000 / + / $1,800
Resources / = / Sources of
Borrowed
Resources / + / Sources of
Owner Invested
Resources / + / Sources of
Management Generated
Resources
Assets / = / Liabilities / + / Stockholders' Equity
$9,250 / = / $450 / + / $7,000 / + / $1,800
+ $600
cash
- $600
accounts receivable
$9,250 / = / $450 / + / $7,000 / + / $1,800
Show how the September 2 collection of cash from a customer serviced in August affects the company's T accounts.
Receivable / Supplies
9/1 $8,250 / 9/1 $600 / 9/1 $400
$400
9/1 $450 / 9/1 $7,000 / 9/1 $1,800
$450 / $7,000 / $1,800
Receivable / Supplies
9/1 $8,250 / 9/1 $600 / 9/2 $600 / 9/1 $400
9/2 $600
$8,850 / $0 / $400
9/1 $450 / 9/1 $7,000 / 9/1 $1,800
$450 / $7,000 / $1,800
Identify the two debit and credit rules developed in the above analysis. One rule has been identified for you.
Assets increase with debits.
Assets decrease with credits.