Accelerated Accounting

Return on Equity (formula)

Net Income / Average Shareholder Equity

Debt-to-Equity Ratio (formula)

Total Liabilities / Total Shareholder Equity

Balance Sheet Equation (normal)

Assets = Liabilities + Total Stockholder’s Equity

Balance Sheet Equation (Capital)

Assets = Borrowed Capital (Liabilities) + Contributed Capital (from investors) & Earned Capital (from profits)

When is revenue recognized (accrual accounting)

Revenue recognition requires that revenue be recognized (recorded) only when goods and services are transferred to customer

When are expenses recognized (accrual accounting)

Costs are recognized as expenses when incurred/used (to earn revenue amounts)

What is an Asset

A present right of an entity to a (probable) economic benefit.

What is a Liability?

A present obligation of an entity to transfer/provide economic benefits to others

What are examples of Current Assets?

Cash and cash equivalents (currency, bank deposits, certificates of deposit, and similar highly liquid holdings)
Marketable securities (short-term investments that can be sold quickly to raise cash)
Accounts receivable (amounts customers owe the company from past credit sales of goods or services)
Inventory (goods bought or produced for sale to customers, plus supplies used in operations)
Prepaid expenses (costs paid in advance for insurance or other services)

What are examples of Noncurrent Assets?

Noncurrent financial investments (debt securities or shares of other firms that management does not intend to sell soon)
Property, plant, and equipment, PPE (land, factory buildings, warehouses, office buildings, machinery, and office equipment used in operations)
Operating lease right-of-use asset (a lessee’s right to use a leased asset over the lease term)
Intangible and other assets (patents, trademarks, franchise rights, goodwill, and other future benefits with no physical substance)

What are examples of Current Liabilities?

Accounts payable (owed to suppliers for goods and services bought on credit; also called trade accounts payable)
Accrued liabilities (expenses recorded but not yet paid, such as wages payable, interest payable, and taxes due)
Short-term borrowings (short-term debt payable to banks or other creditors)
Operating lease obligation (discounted lease payments scheduled to be paid within one year)
Deferred or unearned revenue (obligation created by accepting payment before delivering goods or services; also called contract liability, performance obligation, or customer deposits)
Current maturities of long-term debt (the portion of long-term debt due within one year)

What are examples of Noncurrent Liabilities?

Long-term debt (amounts borrowed from creditors scheduled to be repaid more than one year out)
Operating lease obligation (discounted lease payments scheduled to be repaid more than one year out)
Other long-term liabilities (warranty, deferred compensation, and long-term tax obligations settled at least a year in the future)

What are examples of Contributed Capital?

Common stock (capital received from the primary owners, divided into shares and carried at par or stated value)
Additional paid-in capital (amounts received from shareholders above the par or stated value of the stock)
Treasury stock (amount paid to reacquire the company’s own shares, which reduces contributed capital)

What are examples of Earned Capital?

Retained earnings (accumulated earnings not distributed to stockholders as dividends)
Accumulated other comprehensive income or loss (accumulated equity changes not reported in the income statement)

Practice FSET Entry: On Nov. 2, NBS paid $670 cash to advertise in the local newspaper for November.

Cash Asset: -670 Cash
Noncash Assets: no effect
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: -670 Retained Earnings
Revenues: no effect
Expenses: +670 Advertising Expense
Net Income: -670

Practice FSET Entry: On Nov. 1, investors contributed $20,000 cash to Natural Beauty Supply in exchange for 10,000 shares of common stock.

Cash Asset: +20,000 Cash
Noncash Assets: no effect
Liabilities: no effect
Contrib. Capital: +20,000 Common Stock
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect

Practice FSET Entry: On Nov. 1, NBS purchased and received $17,000 of inventory on credit from a supplier.

Cash Asset: no effect
Noncash Assets: +17,000 Inventory
Liabilities: +17,000 Accounts Payable
Contrib. Capital: no effect
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect

Practice FSET Entry: On Nov. 18, NBS paid $13,300 cash as a partial payment to the suppliers who delivered inventory on Nov. 1.

Cash Asset: -13,300 Cash
Noncash Assets: no effect
Liabilities: -13,300 Accounts Payable
Contrib. Capital: no effect
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect

Practice FSET Entry: During November, NBS sold and delivered products to customers who paid $7,000 cash. The inventory delivered cost $4,000. Record both parts (7a) and (7b).

(7a) Sale of product
Cash Asset: +7,000 Cash
Noncash Assets: no effect
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: +7,000 Retained Earnings
Revenues: +7,000 Sales Revenue
Expenses: no effect
Net Income: +7,000
(7b) Cost of the product sold
Cash Asset: no effect
Noncash Assets: -4,000 Inventory
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: -4,000 Retained Earnings
Revenues: no effect
Expenses: +4,000 Cost of Goods Sold
Net Income: -4,000

Practice FSET Entry: During November, NBS sold $2,400 of products on account to wholesale customers who will pay ten days after delivery. Record the revenue side of the sale (8a) only.

Cash Asset: no effect
Noncash Assets: +2,400 Accounts Receivable
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: +2,400 Retained Earnings
Revenues: +2,400 Sales Revenue
Expenses: no effect
Net Income: +2,400

Practice FSET Entry: On Nov. 24, NBS received a customer order for products to be delivered in December ($700 sales price, $450 cost). Nothing has been delivered or paid.

Cash Asset: no effect
Noncash Assets: no effect
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect
Why: Executory contract - memorandum entry only; no journal entry until the products are delivered.

Practice FSET Entry: On Nov. 25, NBS sold $300 of gift certificates for cash. None had been redeemed by month end.

Cash Asset: +300 Cash
Noncash Assets: no effect
Liabilities: +300 Gift Card Liability
Contrib. Capital: no effect
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect

Practice FSET Entry: On Nov. 30, NBS received $1,450 cash as partial payment from the customers who were billed in transaction 8.

Cash Asset: +1,450 Cash
Noncash Assets: -1,450 Accounts Receivable
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect

Practice FSET Entry: On Nov. 30, NBS repaid the family member who loaned it money, paying $5,050 cash ($5,000 principal plus $50 interest).

Cash Asset: -5,050 Cash
Noncash Assets: no effect
Liabilities: -5,000 Notes Payable
Contrib. Capital: no effect
Earned Capital: -50 Retained Earnings
Revenues: no effect
Expenses: +50 Interest Expense
Net Income: -50

Practice FSET Entry: On Nov. 30, NBS paid a $1,680 annual insurance premium for coverage beginning Dec. 1.

Cash Asset: -1,680 Cash
Noncash Assets: +1,680 Prepaid Insurance
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: no effect
Revenues: no effect
Expenses: no effect
Net Income: no effect

Practice FSET Entry: On Nov. 30, NBS paid a $50 cash dividend to its shareholders.

Cash Asset: -50 Cash
Noncash Assets: no effect
Liabilities: no effect
Contrib. Capital: no effect
Earned Capital: -50 Retained Earnings
Revenues: no effect
Expenses: no effect
Net Income: no effect
Why: A dividend is a capital transaction with shareholders - not an expense, so net income is unaffected.