Module 1 – Exhibits and Key terms Exhibit 1.......................................................................................................................................................................... 2 Exhibit 2.......................................................................................................................................................................... 3 A. Income Statement .............................................................................................................................................. 3 C. Balance Sheet ...................................................................................................................................................... 3 Transactions affecting only the balance sheet ........................................................................................................ 4 1a. Owners invested cash....................................................................................................................................... 4 2a. Borrowed money ............................................................................................................................................... 4 3a. Purchased trucks and office equipment for cash ........................................................................................ 5 4a. Purchased office equipment on account (for credit) ................................................................................... 5 5a. Paid an account payable.................................................................................................................................. 5 Exhibit 3.......................................................................................................................................................................... 6 A Summary of Transactions ................................................................................................................................... 6 B Balance Sheet....................................................................................................................................................... 7 Transactions affecting the income statement and/or balance sheet .................................................................. 8 1b. Earned service revenue and received cash ................................................................................................... 8 2b. Service revenue earned on account (for credit)............................................................................................ 8 3b. Collected cash on accounts receivable ......................................................................................................... 8 4b. Paid salaries ...................................................................................................................................................... 9 Exhibit 4....................................................................................................................................................................... 10 A Summary of Transactions ................................................................................................................................ 10 C Balance Sheet .................................................................................................................................................... 11 B Income Statement ............................................................................................................................................ 11 Key Terms ................................................................................................................................................................... 12 1 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms Exhibit 1 2 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms Exhibit 2 A. Income Statement B. Statement of Retained Earnings METRO COURIIER INC Income Statement For the Month Ended 2010 July 31 METRO COURIER , INC. Statement of Retained Earnings For the Month Ended 2010 July 31 Revenues: Service revenue $ 5,700 Retained earnings, July 1 -0- Add: Net income for July (A)2,100 Expenses: Salaries expense $2,600 Rent expense 400 Gas and oil expense 600 $2,100 (B) Retained earnings, July 31 Total expenses 3,600 Net income $ 2,100 (A) C. Balance Sheet METRO COURIER, INC. Balance Sheet for 2010 July 31 Assets Liabilities and Stockholder's Equity Cash $ 15,500 Account receivables 700 Trucks Office equipment Liabilities: Accounts payable 20,000 Notes payable 2,500 Total liabilities $ 600 $ 6,600 $ 6,600 Stockholders equity: Total assets 3 $ 38,700 Capital stock $30,000 Retained earnings (B)2,100 Total stockholders' equity $ 32,100 Total liabilities and stockholders' equity $ 38,700 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms Transactions affecting only the balance sheet 1a. Owners invested cash Assets Transaction no & Explanation 1a Accounts Receivable Cash Stockholders' Equity =Liabilities + Trucks Office Equipmen t Notes Payable + Accounts Payable Capital Stock Beginning balances Stockholder s invested cash $ -030,000 Balance after transaction 30,000 $ 30,000 Increased by $30,000 Increased by $30,000 $ -0- $ =0- $ -0- = $ -0- $ -0- $ -030,000 2a. Borrowed money Assets Transaction no & Explanation Balances before 2a Accounts Receivable Cash $ 30,000 Borrowed transaction money 6,000 Balance after transaction $ 36,000 Increased by $6,000 4 $ -0- Trucks $ -0- Office Equipment $ -0- = Liabilities + Stockholder's Equity Accounts Payable Notes Payable Capital + Stock = $ -0- $ -0- $ 30,000 6,000 = $ 6,000 Increased by$6,000 Principals of Accounting Accounting and its use in business decisions. + $ 30,000 Module 1 – Exhibits and Key terms 3a. Purchased trucks and office equipment for cash Assets Accounts Receivable Cash Office Equipment Trucks $ 36,000 $ -0(21,500) $ 14,500 Decreased by $21,500 Stockholders' Equity =Liabilities + $ -020,000 $ 20,000 Increased by $20,000 Accounts Payable $ -0- = 1,500 $ 1,500 = Increased by $1,500 Notes Payable $ -0- Capital + Stock $ 6,000 + $ 30,000 $ 6,000 + $ 30,000 4a. Purchased office equipment on account (for credit) Assets Cash Accounts Receivable $ 14,500 $ 14,500 Trucks Stockholders' Equity = Liabilities + Office Equipment $ 20,000 Accounts Payable Notes Payable + $ 1,500 = $ 20,000 1,000 1,000 $ 2,500 = $ 1,000 Increased by $1,000 Capital Stock $ 6,000 $ 30,000 $ 6,000 + $ 30,000 Increased by $1,000 5a. Paid an account payable Assets Transaction no & Explanation 5a Stockholders equity Cash Accounts Trucks Receivable Office Equipment Accounts Payable Notes Payable + Capital Stock Balances before transaction $ 14,500 $ -0- $ 2,500 = $ 1,000 $ 6,000 + $30,000 Paid an account payable (1,000) Balance after transaction $ 13,500 $ 6,000 +$30,000 Decreased by $1,000 5 = Liabilities + $ 20,000 (1,000) $ -0- $ 20,000 $ 2,500 $ -0Decreased by $1,000 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms Exhibit 3 A Summary of Transactions METRO COURIER, INC. Summary of Transactions for Month of June 2010 Assets Transaction no & Explanation Beginning balances 1a Stockholders invested cash 2a Borrowed money trucks and office 3a Purchased equipment for cash -Liabilities Accounts Trucks Receivable Cash $ -0 $ -0- Office Equipment $ -0- $ -0- 6 =$ -0- $ -0- Capital Stock $ -030,000 $ 30,000 $ 30,000 6,000 = 6,000 $ 36,000 = $6000 +$30,000 (21,500) 20,000 1,500 $14,500 $20,000 $ 1,500 = $ 6,000 + $ 30,000 1,000 1,000 $ 6,000 + $ 30,000 $ 2,500 = $ 1,000 $ 6,000 + $ 30,000 $6,000(D) + $ 30,000(E) $ 14,500 End-of-month balances Notes Payable + Stockholders' Equity 30,000 office equipment 4a Purchased on account 5a Paid an account payable Accounts Payable + $20,000 (1,000) $ 13,500(A) (1,000) $ -0- $20,000(B) $ 2,500(C) Principals of Accounting Accounting and its use in business decisions. = $ -0- Module 1 – Exhibits and Key terms B Balance Sheet METRO COURIER, INC. Balance Sheet 2010 June 30 Assets Liabilities and Stockholders' Equity Cash (A) $ 13,500 Liabilities: Trucks (B) 20,000 Notes Payable (D) $6,000 Office (C)2,500 Total $ equipment Liabilities 6,000 Stockholde rs' equity: Total assets 7 $ 36,000 Capital stock Total liabilities and stockholders' equity (E) 30,000 $ 36,000 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms Transactions affecting the income statement and/or balance sheet 1b. Earned service revenue and received cash Assets Transaction no. & Explanation Beginning balances (Exhibit 2) Earned 1b service revenue and received Balances after cash transaction =Liabilities + Cash Accounts Receivable Trucks $ 13,500 $ -0- Office Accounts Equipment Payable $20,000 $ 2,500 = $20,000 $2,500 = Stockholders' Equity Notes Capital Payable +Stock $ -0- $6,000 Retained Earnings $30,000 $ 0 4,800 $6,000 + $ 30,000 $ 4,800 4,800 $ 18,300 Increased by $4,800 Increased by $4,800 2b. Service revenue earned on account (for credit) Assets Transaction no & Explanation Stockholders' +Equity Liabilities Capital + Accounts Trucks Office Accounts Notes Retained Receivabl Equipment Payable Payable Stock Earnings e Balances before $18,300 $ 20,000 $ 2,500 = $ 6,000 $ 30,000 $ 4,800 transaction Cash Earned service 2b revenue on account Balances after transaction $900 $18,300 900 $900 $ 20,000 $ 2,500 = $ 6,000 + $30,000 $5,700 Increased by $900 Increased by $900 3b. Collected cash on accounts receivable Assets Liabilities Transaction no & Accounts Accounts Cash Trucks Office Explanation Receivable Equipment Payable Balances before $18,300 $900 $ 20,000 $ 2,500 = transaction 3b 8 Collected cash on account $200 (200) Balances after transaction $18,500 $700 Increased by $200 Decreased by $200 20,000 $ 2,500 = Notes Payable Stockholders' +Equity Capital + Stock $ 6,000 $ 30,000 $ 6,000 + $ 30,000 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms 4b. Paid salaries Assets = Liabilities + Stockholders' Equity Account Accounts Office Notes Capital Retained Cash s Receivable Trucks Equipment Payable + Stock Earnings Payable $ 18,500 $ 5,700 $700 $ 20,000 $ 2,500 = $6,000 $ 30,000 (2,600) (2,600) $ 15,900 $700 $ 20,000 $ 2,500 = $6,000 + $ 30,000 $ 3,100 Decreased by $2,600 Decreased by $2,600 5b. Paid rent Assets = Liabilities + Stockholders' Equity Office Accounts Notes Retained Cash Accounts Trucks + Capital Equipment Payable Payable Earnings Receivable Stock $15,900 $ 3,100 $700 $ 20,000 $ 2,500 = $ 6,000 $ 30,000 (400) (400) $15,500 $700 $ 20,000 $ 2,500 = $ 6,000 + $ 30,000 Decreased by $400 $ 2,700 Decreased by $400 6b. Received bill for gas and oil used Assets Cash $ 15,500 Accounts Receivable Trucks $ 700 $ 20,000 =Liabilities + Office Equipment Accounts Payable Stockholders' +Equity Notes Payable $ 2,500 = $ 6,000 Capital + Stock $ 30,000 600 $ 15,500 $ 700 $ 20,000 $ 2,500 = $600 $ 2,700 (600) $ 6,000 + $ 30,000 Increased by $600 9 Retained Earnings Principals of Accounting Accounting and its use in business decisions. $2,100 Decreased by $600 Module 1 – Exhibits and Key terms Exhibit 4 A Summary of Transactions METRO COURIER, INC. Summary of Transactions for Month of July 2010 Transaction no & Explanation 1b Beginning balances (Illustration 1.2) Earned service revenue and received cash Assets Accounts Receivable Trucks Cash $13,500 $ -0- 3b 4b Earned service revenue on account Collected cash on account Paid salaries Paid rent Received bill for gas and oil used End-of-month balances Notes Payable Capital + Stock $ -0- $ 6,000 + Retained Earnings $ 30,000 $ -04,800(A) $ 20,000 $ 2,500 = $ 6,000 + $ 30,000 $ 4,800 $18,300 $ 900 200 (200) $18,500 $ 700 900(B) $ 20,000 $ 2,500 = $ 6,000 + $ 30,000 $ 5,700 $ 20,000 $ 2,500 = $ 6,000 + $ 30,000 $ 5,700 (2,600) (2,600)(C) $ 700 $ 20,000 $ 2,500 = $ 6,000 + $ 30,000 $ 3,100 (400) (400)(D) $ 700 $ 20,000 $ 2,500 = $ 6,000 + $ 30,000 $ 2,700 600 $15,500( F) $ 700(G) $20,000(H) $ 2,500=(I) $38,700 10 Stockholders' Equity 900 $15,500 6b Accounts Payable + 4,800 15,900 5b Office Equipment $ 20,000 $ 2,500 = $18,300 2b -Liabilities Principals of Accounting Accounting and its use in business decisions. $600(J) (600)(E) $ 6,000 +(K) $6,600 $ 30,000(L) $ 2,100(M) $32,100 Module 1 – Exhibits and Key terms C Balance Sheet METRO COURIER, INC. Balance Sheet2010 July 31 Assets Cash Liabilities and Stockholders' (F)$15,500 Liabilities: Accounts receivable (G)700 Accounts payable Trucks (J)$600 (H)20,000 Notes payable Office equipment (K)6,000 (I)2,500 Total liabilities Stockholders' equity Capital stock Total assets $6,600 (L)$30,000 Retained earnings (M)2,100 Total stockholders' equity $32,100 $38,700 Total liabilities and stockholders' equity $38,700 B Income Statement METRO COURIER, INC. Income Statement For the Month Ended 2010 July 31 Revenues: Service revenue (A+B)$ 5,700 Expenses: Salaries expense (C)$ 2,600 Rent expense (D)400 Gas & oil expense (F)600 Total expenses 11 3,600 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms Key Terms Accounting equation • Assets = Equities; or Assets = Liabilities + Stockholders’ equity. Accounts payable • Amounts owed to suppliers for goods or services purchased on credit. Accounts receivable • Amounts due from customers for services already provided. Assets • Things of value owned by the business. Examples include cash, machines, and buildings. To their owners, assets possess service potential or utility that can be measured and expressed in money terms. Balance sheet • Financial statement that lists a company’s assets, liabilities, and stockholders’ equity (including dollar amounts) as of a specific moment in time. Also called a statement of financial position. Business entity concept (or accounting entity concept) • The separate existence of the business organization. Capital stock • The title given to an equity account showing the investment in a business corporation by its stockholders. Continuity • See going-concern concept. Corporation • Business incorporated under the laws of one of the states and owned by a few stockholders or by thousands of stockholders. Cost • Sacrifice made or the resources given up, measured in money terms, to acquire some desired thing, such as a new truck (asset). Dividend • Payment (usually of cash) to the owners of a corporation; it is a distribution of income to owners rather than an expense of doing business. Entity • A business unit that is deemed to have an existence separate and apart from its owners, creditors, employees, customers, other interested parties, and other businesses, and for which accounting records are maintained. Equities • Broadly speaking, all claims to, or interests in, assets; includes liabilities and stockholders’ equity. Equity ratio • A ratio found by dividing stockholders’ equity by total equities (or total assets). Exchange-price (or cost) concept (principle) • The objective money prices determined in the exchange process are used to record most assets. Expenses • Costs incurred to produce revenues, measured by the assets surrendered or consumed in serving customers. Going-concern (continuity) concept • The assumption by the accountant that unless strong evidence exists to the contrary, a business entity will continue operations into the indefinite future. Income statement • Financial statement that shows the revenues and expenses and reports the profitability of a business organization for a stated period of time. Sometimes called an earnings statement. Liabilities • Debts owed by a business—or creditors’ equity. Examples: notes payable, accounts payable. Manufacturing companies • Companies that buy materials, convert them into products, and then sell the products to other companies or to final customers. Merchandising companies • Companies that purchase goods ready for sale and sell them to customers. Money measurement concept • Recording and reporting economic activity in a common monetary unit of measure such as the dollar. Net income • Amount by which the revenues of a period exceed the expenses of the same period. Net loss • Amount by which the expenses of a period exceed the revenues of the same period. Notes payable • Amounts owed to parties who loan the company money after the owner 12 Principals of Accounting Accounting and its use in business decisions. Module 1 – Exhibits and Key terms signs a written agreement (a note) for the company to repay each loan. Partnership • An unincorporated business owned by two or more persons associated as partners. Periodicity (time periods) concept • An assumption that an entity’s life can be meaningfully subdivided into time periods (such as months or years) for purposes of reporting its economic activities. Profitability • Ability to generate income. The income statement reflects a company’s profitability. Retained earnings • Accumulated net income less dividend distributions to stockholders. Revenues • Inflows of assets (such as cash) resulting from the sale of products or the rendering of services to customers. Service companies • Companies (such as accounting firms, law firms, or dry cleaning establishments) that perform services for a fee. Single proprietorship • An unincorporated business owned by an individual and often managed by that individual. Solvency • Ability to pay debts as they become due. The balance sheet reflects a company’s solvency. Source document • Any written or printed evidence of a business transaction that describes the essential facts of that transaction, such as receipts for cash paid or received. Statement of cash flows • Financial statement showing cash inflows and outflows for a company over a period of time. Statement of retained earnings • Financial statement used to explain the changes in retained earnings that occurred between two balance sheet dates. Stockholders’ equity • The owners’ interest in a corporation. Stockholders or shareholders • Owners of a corporation; they buy shares of stock, which are units of ownership, in the corporation. Summary of transactions • Teaching tool used in Chapter 1 to show the effects of transactions on the accounting equation. Transaction • A business activity or event that causes a measurable change in the items in the accounting equation, Assets = Liabilities + Stockholders’ equity. 13 Principals of Accounting Accounting and its use in business decisions.