A = L + OE What is Net Income? Net income is not an asset it’s an increase in owners’ equity from profits of the business. A = L + OE Increase Decrease Increase Either (or both) of these effects occur as net income is earned . . . . . . but this is what “net income” really means. 3

A = L + OE Retained Earnings Capital Stock Retained Earnings The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends. 3

Increases owner’s equity. Decreases owner’s equity. Revenue and Expenses The price for goods sold and services rendered during a given accounting period. Increases owner’s equity. The costs of goods and services used up in the process of earning revenue. Decreases owner’s equity.

The Realization Principle: When To Record Revenue Revenue should be recognized at the time goods are sold and services are rendered.

The Matching Principle: When To Record Expenses Expenses should be recorded in the period in which they are used up.

Debits and Credits for Revenue and Expense Expenses decrease owner’s equity. Revenues increase owner’s equity. EQUITIES Debit for Decrease Credit for Increase EXPENSES Credit for Decrease Debit for Increase REVENUES Debit for Decrease Credit for Increase

Investments by and Payments to Owners Payments to owners decrease owners’ equity. Owners’ investments increase owners’ equity. EQUITIES Debit for Decrease Credit for Increase CAPITAL STOCK Debit for Decrease Credit for Increase DIVIDENDS Debit for Increase Credit for Decrease

We will also analyze a dividend transaction. Let’s analyze the revenue, and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction. 9

Will Sales Revenue increase or decrease? May 29: JJ’s provided lawn care services for a client and received $750 in cash. Will Sales Revenue increase or decrease? Will Cash increase or decrease? 3

Cash increases $750 with a debit. May 29: JJ’s provided lawn care services for a client and received $750 in cash. Cash increases $750 with a debit. Sales Revenue increases $750 with a credit. 3

Will Gasoline Expense increase or decrease? May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Will Gasoline Expense increase or decrease? Will Cash increase or decrease? 3

Cash decreases $50 with a credit. May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Cash decreases $50 with a credit. Gasoline Expense increases $50 with a debit. 3

Will Dividends increase or decrease? Will Cash increase or decrease? May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Will Dividends increase or decrease? Will Cash increase or decrease? 3

May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Cash decreases $200 with a credit. Dividends increase $200 with a debit. 3

Balancing a T-Account

First, foot the debit side. Cash First, foot the debit side. 8,000 750 2,500 2,000 50 200 8,750

Cash 8,000 750 2,900 2,500 2,000 50 200 Next, foot the credit side. 8,750 4,750

Subtract total credits from total debits to obtain the account balance. Cash 8,000 750 2,500 2,000 50 200 4,000 8,750 4,750

Now, let’s look at the Trial Balance for JJ’s Lawn Care Service for the month of May. 9

Proves equality of debits and credits. All balances are taken from the ledger accounts on May 31 after considering all of JJ’s transactions for the month. Proves equality of debits and credits. 4

Accrual Basis Vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. Accounting

Accrual Basis Vs. Cash Basis Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. Not GAAP Accounting

The Accounting Cycle Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Make end-of-year adjustments. Prepare adjusted trial balance. Prepare financial statements. Prepare after closing trial balance. Journalize and post closing entries. 3

Prepare adjustments for unrecorded business transactions. UNIT FOUR OBJECTIVE IS TO PREPARE ADJUSTMENTS FOR UNRECORDED BUSINESS TRANSACTIONS.

ADJUSTMENTS OR ADJUSTING ENTRIES Journal entries made to record business transactions that are not recorded during the accounting period.

On December 31, 20X5, the supplies on hand total $500. Supplies Expense 500 Supplies 1,000 500 On December 31, 20X5, the supplies on hand total $500. $1,000 Balance - $500 On Hand = $500 Supplies Used

GENERAL JOURNAL Page 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT 20X5 Dec. 31 Supplies Expense 500.00 Supplies 500.00 To record the supplies used during December

PURCHASE OF EQUIPMENT On November 9 & 10th, the firm purchased equipment at a total cost of $15,000. This equipment was put to use in December when the firm opened for business. At the time the equipment was bought, its cost was debited to the asset account Equipment.

Depreciation Depreciation is the process of allocating the cost of a long-term asset to operations during its expected useful life. It has been determined that the equipment we have purchased has a useful life of 5 years.

SALVAGE VALUE Salvage value is the amount an item can be sold for after it has been used by the business. The $15,000 worth of equipment we purchased has no salvage value.

STRAIGHT-LINE DEPRICIATION One of many different ways to figure amortization. Formula: Depreciation = Cost - Salvage Value Estimated months of useful life The formula results in an equal amount of depreciation being charged to each accounting period during the asset’s useful life.

FORMULA Depreciation = Cost - Salvage Value Estimated months of useful life Equipment cost $15,000, had 0 salvage and an estimated life of 5 years. (5 yr. X 12 mo. = 60 months) Depreciation = $15,000 - 0 = $250.00 60

BOOK VALUE The portion of an asset’s original cost that has not yet been amortized.

BOOK VALUE Equipment $15,000 Accumulated Depreciation - 250

CONTRA ASSET ACCOUNT A contra asset account has a balance “contra” or opposite to the normal balance of an asset account. An example of a contra asset account is: Accumulated Depreciation - Equipment.

Depreciation Expense - Equipment Acc. Depreciation Equipment 250 Acc. Depreciation Equipment 250

GENERAL JOURNAL Page 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT 20X5 Dec. 31 Depreciation Expense 250.00 Accumulated Depreciation 250.00 To record the cost of equipment allocated to producing revenue in December