LO2-1 Effects of Transactions on Assets, Liabilities, and Stockholders’ Equity

What are external transactions?

Exchanges between the company and an outside party (customers, vendors, banks, employees).

What makes a transaction recordable?

It must affect assets, liabilities, or stockholders’ equity.

What is the basic accounting equation?

Assets = Liabilities + Stockholders’ Equity

What is Step 1 in measuring transactions?

Use source documents (invoices, bills, contracts) to identify what happened.

What is an account?

A record that tracks all increases and decreases for one specific item

Examples of asset accounts?

Cash, Supplies, Equipment, Prepaid Rent.

Examples of liability accounts?

Accounts Payable, Salaries Payable, Notes Payable.

Examples of stockholders’ equity accounts?

Common Stock, Retained Earnings.

What does “on account” mean?

The company did not pay cash yet; it owes money later → liability increases.

What is a chart of accounts?

A list of all account names a company uses

Transaction (1): Issue common stock for $200,000

Effect:
Cash up
Common stock up

Transaction (2): Borrow $100,000 from bank

Cash up
Notes payable (cash borrowed from bank) up

Transaction (3): Buy equipment for $120,000 cash

Equipment up

Cash down
(Total assets unchanged)

Transaction (4): Pay $60,000 rent in advance

Prepaid Rent up

Cash down
(Total assets unchanged)

Why is prepaid rent an asset?

It represents a future benefit (future use of space)

Transaction (5): Buy $23,000 supplies on account

Supplies up

Accounts Payable up

What happens later when the company pays the supplier?

Cash down
Accounts payable down

What is the dual effect of every transaction?

At least two accounts change, keeping the equation balanced.

What question must ALWAYS be answered “yes”?

“Do assets equal liabilities + stockholders’ equity?”