Introduction to Financial Accounting - Financial Accounting - Lecture Notes, Study notes for Financial Accounting. Manav Bharti University. Introduction to Financial Accounting - Financial Accounting - Lecture Notes, Study notes for Financial Accounting. Manav Bharti University.

Page 2 of 16  Average assets are used because sales are made throughout the period and the average assets approximates the different amounts of assets used throughout the period. Key Topics to Know Accounting Equation Assets = Liabilities + Stockholder’s Equity OR Assets - Liabilities = Stockholder’s Equity The equation means that:  The value of the property the company owns equals the funding sources the company used to acquire the property.

 The value of the property the company owns equals the claims of creditors to the property plus the claims of the company’s owners to the property (remember that the claims of the creditors are satisfied first, so the owners are entitled to claim only the remaining property.)  Stockholder’s Equity is also called Net Worth because it represents what the company is worth to its owners after all liabilities have been paid. Owners’ Equity is NOT a single account in the general ledger.

It is a collection of accounts, some of which add to the value of the company and others which reduce the value of the company to its owners:  Capital stock increases Owners’ Equity because it is an investment of capital in the company.  Dividends decrease Owners’ Equity because they are a return of assets to the owners, reducing what the company is worth to the owners.

Tibia Auto 7.6.  Revenue (or sales or fees earned) increases Owners’ Equity because the company receives assets for providing its goods or services, increasing what the company is worth to the owners.  Expenses, the costs incurred to produce revenue, reduce Owners’ Equity because the company uses up or consumes assets, reducing what the company is worth to the owners. Page 3 of 16  Net Income is Revenue minus Expenses, also known as profit. Net Income may be negative if Expenses exceed Revenues, when it is known as Net Loss. Net Income increases Owners’ Equity whereas Net Loss reduces Owners’ Equity.  Retained earnings, in the simplest terms, is the accumulation of all Net Income and Net Losses less all the dividends paid to the owners since the company’s formation. Example #1: John Smith is the sole stockholder and operator of Just-In-Time, a consulting firm.

At the end of its accounting period, December 31, 2010, Just-In-Time has assets of $375,000 and liabilities of $125,000. Required: Using the accounting equation and considering each case independently, determine the following amounts: a) Stockholder’s equity on. B) The amount and direction (increase or decrease) change in stockholder’s equity if, during 2011, assets increased by $32,000 and liabilities decreased by $8,000. C) Net income (or net loss) during 2001, assuming that as of December 31, 2011, assets were $367,000, liabilities were $110,000, capital stock of $40,000 was issued, and dividends of $60,000 were paid. Solution #1: Assets = Liabilities + Owners’ Equity a) $375,000 = $125,000 +? 375,000 = 125,000 + 250,000 b) Change in 2011 + 32,000 = -8,000 +? 32,000 = -8,000 + 40,000 c) Step 1: solve for change in equity $367,000 = $110,000 + $257,000 375,000 = 125,000 + 250,000 Change in 2011 - $8,000 = -$15,000 + $7,000 Step 2: solve for net income Capital stock - Dividends + Net Income = Change in Equity $40,000 - -60,000 +?

Western Civilization Spielvogel 6th Edition Study Guide. = $7,000 Net Income = $27,000 = 7,000 - 40,000 + 60,000 Docsity.com. Page 4 of 16 Practice Problem #1: Sarah Jones is the sole stockholder and operator of Sarah’s Catering Company. At the end of the accounting period, December 31, 2000, Sarah’s Catering has assets of $135,000 and liabilities of $72,000. Required: Using the accounting equation and considering each case independently, determine the following amounts: a) Stockholder’s equity on.

B) The amount and direction (increase or decrease) of the period’s change in stockholder’s equity if, during 2001, assets decreased by $22,000 and liabilities decreased by $7,000. C) Net income (or net loss) during 2001, assuming that as of December 31, 2001, assets were $148,000, liabilities were $75,000, capital stock of $25,000 was issued and dividends of $12,000 were paid. Effects of Transactions on the Accounting Equation The accounting equation must always be in balance. Each transaction must also be in balance. Transactions which “cross the equal sign” must either increase or decrease both sides of the accounting equation. Transactions which are entirely on one side of the equal sign must contain offsetting increases and decreases, such as an increase in a liability offset by a decrease in owners’ equity. Example #2: For each of the following transactions, indicate which elements of the accounting equation are affected (minimum of 2 per transaction) and whether the element has increased or decreased as a result.