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Accounting Principles: Income Statement & Balance Sheet

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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.
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Principals of Accounting  Accounting and its use in business decisions.
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