1.3 Business transactions and accounting

Accounting equation

The basic relationship showing that $\text{Assets} = \text{Liabilities} + \text{Equity}$.

Assets

Resources a business owns or controls that are expected to provide future benefits.

Liabilities

Obligations a business owes to others.

Equity

The owner's claim on the assets of the business after liabilities are subtracted.

Owner's claim

The financial interest of an owner in a business.

Creditor's claim

The amount of a company's assets that creditors have a right to because the company owes them.

Net assets

Another term for equity; assets minus liabilities.

Residual equity

Another term for equity; what remains after liabilities are subtracted from assets.

Expanded accounting equation

$\text{Assets} = \text{Liabilities} + \text{Common Stock} - \text{Dividends} + \text{Revenues} - \text{Expenses}$.

Contributed capital

Money or other assets contributed to a corporation by its owners.

Common stock

Ownership contributed by shareholders in exchange for stock; increases equity.

Stock issuance

The act of a corporation issuing stock to owners in exchange for cash or other assets.

Owner investment

Cash or other assets contributed by an owner to the business.

Retained earnings

Accumulated profits kept in the business rather than distributed as dividends.

Dividends

Cash or other assets distributed to shareholders; decreases equity and is not an expense.

Revenue

Amounts earned from providing goods or services to customers; increases equity.

Expense

A cost incurred to help operate the business and earn revenue; decreases equity.

Net income

Revenue minus expenses when revenue is greater than expenses.

Net loss

The amount by which expenses exceed revenues.

Cash

Money owned by a business; an asset.

Supplies

Items a business owns and expects to use in operations; an asset until used.

Equipment

Long-term items used to operate a business; an asset.

Land

Property owned by a business; an asset.

Accounts receivable

Amounts customers owe the business for goods or services already provided.

Receivable

An amount expected to be received by a business in the future.

Accounts payable

Amounts the business owes suppliers or other creditors.

Payable

An amount a business owes and expects to pay in the future.

Wages payable

Amounts owed to employees for work already performed.

Notes payable

Amounts owed under a written promise to repay borrowed money.

Loan

Money borrowed that must be repaid.

Taxes payable

Taxes a business owes but has not yet paid.

Future inflow

Money or other resources expected to come into the business later.

Future outflow

Money or other resources expected to leave the business later.

On credit

Buying or selling now and paying or receiving cash later.

On account

A phrase meaning payment will happen later rather than immediately.

Credit purchase

A purchase made now with payment promised for a later date.

Credit sale

A sale where the customer receives goods or services now and promises to pay later.

Business transaction

An economic activity or exchange that affects a company's accounting equation.

Transaction analysis

The process of identifying which accounts are affected by a transaction and whether they increase or decrease.

External transaction

An exchange of value between a business and an outside entity.

Internal transaction

A financial event occurring within a business that may affect its accounting records.

Entity

A separate person, business, or organization involved in a transaction.

Event

A happening that affects the accounting equation and can be measured reliably.

Business event

An event arising from business activities that affects accounting amounts.

Natural event

A nonbusiness event, such as a fire, that can affect company assets or liabilities.

Exchange of value

A transaction in which goods, services, money, or other resources are exchanged.

Balance

The amount currently recorded in an account.

Old balance

The account balance before a transaction occurs.

New balance

The account balance after a transaction is recorded.

Purchase

Acquiring goods, supplies, equipment, or other assets.

Purchase for cash

Buying an item and paying cash immediately.

Purchase on credit

Buying an item now and promising to pay later.

Provide services for cash

Performing services and immediately receiving cash, which increases cash and revenue.

Provide services on credit

Performing services now and allowing the customer to pay later, creating accounts receivable and revenue.

Service revenue

Revenue earned by performing services for customers.

Consulting revenue

Revenue earned from providing consulting services.

Rental revenue

Revenue earned from renting property, equipment, or facilities to others.

Receipt of cash

Cash received by a business; does not always mean new revenue was earned.

Collection of accounts receivable

Receiving cash from a customer who previously owed the business money.

Payment of accounts payable

Paying money previously owed to a supplier or creditor, reducing both cash and accounts payable.

Partial payment

Paying only part of an amount that is owed.

Incurred

An accounting term meaning an expense or obligation has occurred and must be recorded.

Salary expense

Cost of employee work used during a period.

Rent expense

Cost of renting property or facilities used by the business.

Expense recognition

Recording an expense in the period in which it helps generate revenue.

Payment of cash dividend

Distribution of cash to shareholders that decreases both cash and equity.