Fundamental Accounting Principles and Cycle: Assets, Liabilities, Equity, Revenues, Expenses

Accounting Equation

Assets = Liabilities + Owners' Equity.

Accrual Accounting Assumption

Revenues are recorded when earned, and expenses when incurred, regardless of cash movement.

Double-Entry Accounting

Every transaction affects at least two accounts, with debits equaling credits.

Rule for Assets (Cash, Inventory, Equipment, Accounts Receivable)

Debit = Increase, Credit = Decrease.

Rule for Liabilities (Note Payable, Interest Payable, Accounts Payable, Dividends Payable)

Debit = Decrease, Credit = Increase.

Rule for Equity (Common Stock, Retained Earnings)

Debit = Decrease, Credit = Increase.

Rule for Revenue accounts (Sales Revenue)

Debit = Decrease, Credit = Increase.

Rule for Expense accounts (COGS, Rent, Wages, Interest)

Debit = Increase, Credit = Decrease.

Cash

Asset account representing money on hand.

My Claim / Sister's Claim

Owners' Equity accounts tracking individual ownership shares.

Dad's Claim

Liability account showing borrowed funds owed back (Note Payable).

Common Stock

Equity account recording owners' investments into the business.

Note Payable

Liability account representing formal debt owed to lenders.

Inventory

Asset account for goods purchased for resale.

Equipment

Asset account for resources used in operations (not resale).

Retained Earnings

Equity account representing owners' claim from operations (profits kept).

How does Retained Earnings increase?

Through net income (revenues > expenses).

How does Retained Earnings decrease?

Through net loss or dividends.

Difference between Common Stock and Retained Earnings

Common Stock = owners' contributions. Retained Earnings = results from business operations.

Sales Revenue

Equity increase from selling goods/services.

Cost of Goods Sold (COGS)

Expense for the cost of inventory sold.

Rent Expense

Expense for building/facility use.

Wages Expense

Expense for employee compensation.

Interest Expense

Expense for cost of borrowing funds.

Temporary accounts

Revenues & Expenses — closed into Retained Earnings at period end.

Permanent accounts

Assets, Liabilities, Common Stock, Retained Earnings.

Purpose of closing entries

To reset revenue and expense accounts to zero for the new period.

Post-Closing Trial Balance

Report that shows balances of only permanent accounts after closing.

Accounts Payable

Liability account for amounts owed to vendors for purchases on credit.

9 Steps of the Accounting Cycle

Analyze transactions, Journalize transactions, Post to Ledger, Prepare Trial Balance, Adjusting entries, Adjusted Trial Balance, Prepare Financial Statements, Closing entries, Post-Closing Trial Balance.

Dividends Payable

Liability created when a dividend is declared.

How do dividends affect Retained Earnings?

They reduce Retained Earnings at declaration (not an expense).

Are dividends an expense?

No — they are a distribution of equity, not part of operations.

Three important dividend dates

Date of Declaration → Dividend becomes a legal obligation. Date of Record → Determines which stockholders receive dividend. Date of Payment → Cash is paid to shareholders.

Dividend Journal Entries

Declaration: Debit Retained Earnings, Credit Dividends Payable. Payment: Debit Dividends Payable, Credit Cash.