accounting and accountability pt 1

expanded accounting equation

What does the accounting equation represent?

The relationship between a business's assets, liabilities, and equity.

What is the expanded accounting equation?

It breaks down the equity portion into shares issued, dividends, revenues, and expenses.

What are assets?

Resources a business owns that have economic value, represented on the balance sheet.

Give examples of assets.

Cash, accounts receivable, inventory, supplies, prepaid expenses, notes receivable, equipment, buildings, machinery, and land.

What are liabilities?

Obligations to pay an amount or debt owed to a lender based on past transactions.

What is an example of accounts payable?

Money the business owes because it has purchased goods or services and has not yet paid.

What is unearned revenue?

A customer’s advanced payment for a product or service that has yet to be delivered.

What components make up shareholders' equity?

Contributed capital from issued shares and retained earnings.

How does the revenue recognition principle affect unearned revenue?

It prevents recognizing payment as revenue until the related product or service is provided.

What is the expense recognition principle?

It states that expenses should be recognized when incurred, not necessarily when paid.

What happens to retained earnings when expenses increase?

Retained earnings decrease.

How does net income affect retained earnings?

An increase in net income increases retained earnings.

What is the difference between cash and accounts receivable?

Cash is liquid money, while accounts receivable is money owed by customers for goods/services provided.

What is depreciation?

The process of allocating the cost of a tangible asset over its useful life.

What is meant by 'contributed capital'?

The funds provided by shareholders in exchange for shares of stock in the business.

What occurs when a business pays dividends?

It decreases retained earnings.

How does a company calculate net income?

By subtracting total expenses from total revenues on the income statement.

What is the significance of the statement of retained earnings?

It calculates the retained earnings balance by adjusting for net income and dividends.