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Introduction to Accounting Preparing for a User’s Perspective
Define common equity accounts Debits and Credits Trainer By Kevin C. Kimball, CPA with support from Free Jan. 2014 Available on the Google Play Store
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How is equity defined by the FASB?
“Equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities.” Statement of Financial Accounting Concepts No. 6 Elements of Financial Statements—a replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2) CON Copyrighted by, and reproduced with permission of, the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, USA. Assets = Liabilities + Equity Assets - Liabilities = Equity Let’s look at some common equity accounts and see what increases and decreases them.
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Common Equity Accounts Kevin Kimball, Capital Teresa Kimball, Capital
Common Stock Preferred Stock Retained Earnings Capital distributions Withdrawals Dividends Revenues Gains Expenses Losses These equity accounts keep a permanent running total of the company’s total equity. Appear on Balance Sheet Appear on Statement of Owners’ Equity or Shareholders’ Equity These equity accounts are only temporarily used during a given period to explain why the equity accounts on the balance sheet changed. Appear on Income Statement
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T-Account Format = + Assets Liabilities Equity Beg. Balance
+ Increases Decreases End. Balance = Liabilities Beg. Balance - Decreases Increases End. Balance + Equity Beg. Balance - Decreases Increases End. Balance
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Total Shareholder Equity
Contributed Equity Capital Stock Earned Equity Retained Earnings + Decreases Increases Decreases Increases Capital distributions Capital contributions Dividends Withdrawals Stock repurchases Stock issuances Expenses Losses Revenues Gains
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What transactions could explain these different examples?
Assets - Liabilities = Equity When assets increase by more than liabilities, owners’ equity will increase. + 10 - 7 = +3 When assets increase by the same amount as liabilities, owners’ equity will not change. + 10 - 10 = When assets increase by less than liabilities, owners’ equity will decrease. + 10 - 13 = -3 What transactions could explain these different examples?
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When assets increase by more than liabilities, owners’ equity will increase.
Purchase inventory for $10 on account and then resell inventory to customers for $13 on account. Contributed Equity Capital Stock + Earned Equity Retained Earnings = Assets – Liabilities + - - + Decreases Increases Decreases Increases Capital distributions Capital contributions Dividends Stock repurchases Stock issuances Withdrawals Expenses Revenues
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When assets increase by more than liabilities, owners’ equity will increase.
Issue $3 in stock in exchange for a company with $13 in assets and $10 in liabilities. Contributed Equity Capital Stock + Earned Equity Retained Earnings = Assets – Liabilities + - - + Decreases Increases Decreases Increases Capital distributions Capital contributions Dividends Stock repurchases Stock issuances Withdrawals Expenses Revenues
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= + Issue $3 in stock in exchange for cash.
When assets increase by more than liabilities, owners’ equity will increase. Issue $3 in stock in exchange for cash. Contributed Equity Capital Stock + Earned Equity Retained Earnings = Assets – Liabilities + - - + Decreases Increases Decreases Increases Capital distributions Capital contributions Dividends Stock repurchases Stock issuances Withdrawals Expenses Revenues
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= + Purchase $10 of inventory on account.
When assets increase by the same amount as liabilities, owners’ equity will not change. Purchase $10 of inventory on account. Borrow $10 under a note agreement. Borrow $10 using a mortgage to purchase a $10 home (100% financing). = Contributed Equity Capital Stock + Earned Equity Retained Earnings Assets – Liabilities + - - + Decreases Increases Decreases Increases Capital distributions Capital contributions Dividends Stock repurchases Stock issuances Withdrawals Expenses Revenues
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= + Purchase $13 of inventory on account and then sell it for $10.
When assets increase by less than liabilities, owners’ equity will decrease. Purchase $13 of inventory on account and then sell it for $10. Borrow $13 and then owners withdraw $3 in cash (i.e. pay a $3 dividend). = Contributed Equity Capital Stock + Earned Equity Retained Earnings Assets – Liabilities + - - + Decreases Increases Decreases Increases Capital distributions Capital contributions Dividends Stock repurchases Stock issuances Withdrawals Expenses Revenues
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Introduction to Accounting Preparing for a User’s Perspective
Define common equity accounts Debits and Credits Trainer By Kevin C. Kimball, CPA with support from Free Jan. 2014 Available on the Google Play Store
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