LO2-2 Effects of Transactions on Revenues, Expenses, and Dividends

What are the two components of stockholders’ equity?

Common Stock and Retained Earnings.

What does Common Stock represent?

Investments made by stockholders.

What does Retained Earnings represent?

Net income kept in the business (not paid out as dividends).

What three things make up Retained Earnings?

Revenues, Expenses, Dividends.

How do revenues affect Retained Earnings?

Revenues increase Retained Earnings.

How do expenses affect Retained Earnings?

Expenses decrease Retained Earnings.

How do dividends affect Retained Earnings?

Dividends decrease Retained Earnings.

What happens when Eagle provides services for $43,000 cash?

Cash ↑ and Service Revenue ↑.

Why does Service Revenue increase equity?

Because revenue increases net income → increases Retained Earnings → increases equity.

Which accounts change in Transaction (6)?

Cash ↑ (asset), Service Revenue ↑ (equity).

What does “on account” mean?

Customer will pay later; company records Accounts Receivable.

What happens when Eagle provides $20,000 of services on account?

Accounts Receivable ↑ and Service Revenue ↑.

Why is Accounts Receivable an asset?

It’s a right to receive cash in the future.

Does revenue get recorded even if cash isn’t received yet?

Yes — revenue is recognized when the service is provided.

What happens later when the customer pays?

Cash ↑ and Accounts Receivable ↓ (swap of assets).

What does it mean when a company receives cash before providing services?

The company has a liability called Deferred Revenue.

Why is cash received in advance not revenue?

Because the service hasn’t been provided yet (revenue recognition principle).

What accounts change in Transaction (8)?

Cash ↑ and Deferred Revenue ↑.

Why is Deferred Revenue a liability?

The company owes the customer future services.

What happens later when the service is provided?

Deferred Revenue ↓ and Service Revenue ↑.

What type of account is Salaries Expense?

An expense that reduces Retained Earnings.

What accounts change in Transaction (9)?

Cash ↓ and Salaries Expense ↑ (which makes Retained Earnings ↓).

How do expenses affect equity?

Expenses ↓ Net Income → ↓ Retained Earnings → ↓ Equity.

Why aren’t salaries recorded as an asset?

They provide no future benefit — the work is already done.

What is a dividend?

A distribution of profits to stockholders.

Are dividends an expense?

No — they do not help the company operate

What accounts change in Transaction (10)?

Cash ↓ and Dividends ↑ (which makes Retained Earnings ↓).

How do dividends affect equity?

Dividends ↓ Retained Earnings → ↓ Equity.

Why doesn’t paying dividends increase equity?

Because accounting is from the company’s perspective — the company loses cash.

Issue common stock for $200,000

Cash up

Common stock up

Borrow $100,000 from the bank

Cash up

Notes payable up

Buy equipment for $120,000 cash

Equipment up

Cash down

(Swap assets)

Pay $60,000 rent in advance

Prepaid rent up

Cash down

(Swap assets)

Buy $23,000 supplies on account

Supplies up

Accounts payable up

Provide services for $43,000 cash

Cash up

Service revenue up (retained earnings up)

Provide $20,000 services on account

Accounts receivable up

Service revenue up (retained earnings up)

Receive $6,000 cash in advance

Cash up

Deferred revenue up (liability)

Pay $28,000 salaries

Cash down

Salaries expense up (retained earnings down)

Pay $4,000 dividends

Cash down

Dividends up (retained earnings down)

10 Transactions

Issue of Common Stock

Borrow from Bank

Buy Equipment

Pay rent in advance

Buy supplies on account

Provide services for cash

Provide services on account

Receive cash in advance

Pay salaries

Pay dividends