Types of Accounts
Accounting
Information
System
The Accounting Equation
Assets = Liabilities + Owners’ Equity
Relationships
•The results of the profit
equation are added to Owners’
Equity.
•Therefore we can derive the
relationship:
Assets = Liabilities + Owners’ Equity
+ (Revenues - Expenses)
• Asset
• Liability
• Owners’
O
Equity
• Revenue
• Expense
The Profit Equation
Revenues - Expenses = Net Income
Double-Entry
Bookkeeping
A system used to ensure a
balance is maintained at all
times in the accounting
equation
Assets = Liabilities + Owners’ Equity + Revenues - Expenses
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Debits and Credits
• Debits increase assets and
expenses
• Debits decrease liabilities,
owners’ equity, and revenues
• Credits increase liabilities,
owners’ equity and revenues
• Credits decrease assets and
expenses
Four Financial Reports
•The Balance Sheet
•The Income Statement
•The Cash Flow statement
•The Statement of Retained
Earnings
The Income Statement
•Reflects the
company’s
profitability
during a
period of time
•Shows the
results of the
profit equation
Accruals and Deferrals
Accrued
expenses
Accrued
revenues
Deferred
revenues
Deferred
expenses
The Balance Sheet
• A report
which shows
the company
company’ss
financial
position
• Reflects the
accounting
equation
The Statement of Cash Flows
• Reports cash
transactions
during the
period
• Financing,
investing, and
operating
activities
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Statement of Retained Earnings
Retained earnings is an
owners’ equity account
which
hi h represents
t profits
fit
which have been left in the
business by the owners
The Closing Process
The results of the profit equation
are added to an account called
retained earnings.
Revenue - Expense = Net Income
The Closing Process
The results of the profit equation
are added to an account called
retained earnings.
The Closing Process
• Introduce a new account--Income Summary-into the system.
• Force all expenses to zero, making a
corresponding entry to Income Summary
• Force all revenues to zero,
zero making a
corresponding entry to income Summary
• Force Income Summary to zero, making a
corresponding entry to Retained Earnings
• Close dividends directly to retained earnings
Retained Earnings
Accounting
Information
System
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