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Full Material: Accounting Introduction UC3M
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Material on chapters 2 to 6 on introduction to accounting
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1Chapter 2: The Accounting Equation
The value of the company:
Assets - Liabilities = Owners Equity
Economic Resources = Claims to Economic Resources
Assets = Liabilities + Owners Equity
Assets: goods, rights and other resources controlled by the company as a result of
past events, from which future economic benefits are expected. Claims to assets come
from liabilities (economic obligations, debts) and owners equity (capital).
- Current Assets: those expected to be held for 12 months or the business
normal operating cycle → cash, acc receivable, merchandise inventory,
prepaid expenses, short-term investment.
- L/t Assets: expected to be held longer than 12 months or the normal operating
cycle → property, plant, equipment, l/t investment, intangible assets.
Liabilities: present obligations of the company arising from past events, the
settlement of which is expected to result in an outflow of resources from the
company embodying future economic benefits. They shall include provisions.
- Current Liabilities: Debts payable within one year or within the business’s
normal operating cycle → notes payable, acc payable, accrued expenses
payable, income taxes payable.
- Long-term liabilities: Debts not payable within one year or within the
business’s normal operating cycle → notes payable, bonds, etc.
Owners Equity: Amount of an entity’s assets that remain after its liabilities are
subtracted→ the purpose of a business is to increase owner's equity. Consists of
Paid-in Capital and Retained Earnings.
- Consists of → common stock, Retained Earnings and Profits.
→ Retained Earnings: earned by income-producing activities, kept for use in the
business. It is affected by revenues (increases from delivering gg or ss), and expenses
(decreases that result from operations). Investments or withdrawals from the
business also have an effect.
→ Dividends: distributions to stockholders (normally cash), generated by net
income.
, 2
Transactions must be stated in monetary terms to be entered in books, and shall
involve give-get exchanges:
1) The owners invest $50,000 of their money to begin the business, and Air &
Sea Travel issues common stock to them.
2) Air & Sea Travel purchases land for a future office location, paying cash of
$40,000.
3) The business buys stationery and other office supplies, agreeing to pay $500
to the office-supply store within 30 days.
4) Air & Sea Travel earns service revenue of $5,500 and collects this amount in
cash.
5) Air & Sea Travel performs services for customers on account for $3,000.
6) Air & Sea Travel pays $2,700 for the following cash expenses: office rent
$1,100, employee salary $1,200, and utilities $400.
7) Air & Sea Travel pays $400 to the store from which it purchased $500 worth
of office supplies in Transaction 3.
8) The owners remodel their home at a cost of $30,000, paying cash from
personal funds.
9) The business collects $1,000 from a customer on account.
10)Air & Sea Travel sells land for a price of $22,000, which is equal to the
amount it paid for the land.
11) The corporation declares a dividend and pays $2,100 cash to the stockholders.
, 3
The Financial Statements:
Relationship Among the Financial Statements:
- Income Statement is the first to be completed.
- Retained Earnings requires net income to calculate an ending balance.
- Balance Sheet requires the ending balance of retained earnings to balance.
- Statement of Cash flows reports increases and decreases in cash and must
agree with the cash balance on the balance sheet.
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