HS

Lecture Notes: Chart of Accounts (Assets, Liabilities, Equity, Revenue, and Expenses)

Assets

  • Definition: Resources controlled by the business that are expected to bring future economic benefits.
  • Items listed in transcript (Asset):
    • Cash (Asset)
    • Supplies (Asset)
    • Inventory (Asset)
    • Accounts Receivable (Asset)
    • Office Equipment (Asset)
    • Building (Asset)
    • Land (Asset)
    • Furniture & Fixtures (Asset)
  • Additional note: Assets increase with debits and decrease with credits in the accounting system.

Liabilities

  • Definition: Obligations the business owes to external parties.
  • Items listed in transcript (Liability):
    • Accounts Payable (Liability)
  • Additional note: Liabilities increase with credits and decrease with debits.

Equity (Owner's Equity)

  • Definition: The owner’s residual interest in the assets after deducting liabilities.
  • Items listed in transcript (Equity):
    • Common Stock (Equity)
    • Capital (Owner’s Equity) (OE)
    • Retained Earnings (OE)
  • Explanation:
    • Common Stock represents contributed capital by owners.
    • Capital (OE) is another form of owner's claim, often used interchangeably with Owner’s Equity.
    • Retained Earnings accumulate the cumulative earnings kept in the business (net income minus any drawings/dividends).
  • Note: In the expanded form, Retained Earnings changes with net income and distributions to owners.

Revenue (Income)

  • Definition: Inflows from delivering goods or services to customers.
  • Item listed in transcript (Revenue):
    • Service Revenue (Income)
  • Impact on financials:
    • Revenues increase equity (via increase in retained earnings at period end).

Expenses

  • Definition: Costs incurred to operate the business and earn revenue.
  • Items listed in transcript (Expenses):
    • Rent (Expense)
    • Salaries Expenses (Expense)
    • Utilities Expenses (Expense)
    • Taxes (Tax Expense) [note: Taxes can also appear as a tax payable liability; here treated as an expense in the income statement context]
  • Impact on financials:
    • Expenses decrease equity (via reduction of retained earnings at period end).

Key accounting relationships

  • The Accounting Equation (Fundamental):

    ext{Assets} = ext{Liabilities} + ext{Owner's Equity}
  • Net income effect on equity:
    • Net Income increases Retained Earnings (part of OE) and thus increases Equity.
    • Net Loss decreases Retained Earnings and Equity.
  • Double-entry principle:
    • Every transaction has at least one debit and at least one credit with total debits equaling total credits.
  • Normal balances by account type:
    • Assets: Debit (increases) / Credit (decreases)
    • Liabilities: Credit (increases) / Debit (decreases)
    • Equity: Credit (increases) / Debit (decreases)
    • Revenue: Credit (increases) / Debit (decreases)
    • Expenses: Debit (increases) / Credit (decreases)

Net income and its linkage to equity

  • Net Income formula:
    ext{Net Income} = ext{Service Revenue} - igl( ext{Salaries Expenses} + ext{Utilities Expenses} + ext{Rent}igr)
  • Effect on Retained Earnings:
    • Net Income increases Retained Earnings (part of OE).
    • Net Loss decreases Retained Earnings.
  • Journal entry intuition:
    • Revenue increases assets or adds receivables; increases equity via retained earnings.
    • Expenses decrease equity via reduction of retained earnings.

Practical implications and examples (conceptual)

  • Example 1: Cash sale of services for $1,000
    • Debit: Cash $1,000
    • Credit: Service Revenue $1,000
    • Effect: Asset up, Revenue up, Equity up.
  • Example 2: Purchase of Office Equipment with cash for $5,000
    • Debit: Office Equipment $5,000
    • Credit: Cash $5,000
    • Effect: Asset exchange within assets; no effect on total assets, but changes asset composition.
  • Example 3: Incurring Salaries Expense of $2,500 on credit
    • Debit: Salaries Expenses $2,500
    • Credit: Accounts Payable $2,500
    • Effect: Expense increases, Liabilities increase; equity decreases via retained earnings later when closing.
  • Example 4: Receiving cash for Service Revenue $750
    • Debit: Cash $750
    • Credit: Service Revenue $750
    • Effect: Asset up, Revenue up, Equity up.

Connections to broader concepts

  • Relationship to financial statements:
    • Balance Sheet: Assets, Liabilities, Equity (including Common Stock, Capital, Retained Earnings, etc.)
    • Income Statement: Revenues and Expenses (e.g., Service Revenue, Rent, Salaries, Utilities, Taxes)
  • Real-world relevance:
    • Proper classification affects financial ratios, liquidity analysis, and decision-making.
  • Ethical and practical implications:
    • Accurate classification and disclosure ensure faithful representation of the financial position and performance.
    • Misclassification can mislead stakeholders and influence resource allocation or investment decisions.

Quick reference and cheat sheet

  • Major categories from transcript:
    • Assets: Cash, Supplies, Inventory, Accounts Receivable, Office Equipment, Building, Land, Furniture & Fixtures
    • Liabilities: Accounts Payable
    • Equity: Common Stock, Capital (OE), Retained Earnings
    • Revenue: Service Revenue
    • Expenses: Rent, Salaries Expenses, Utilities Expenses, Taxes
  • Core formulas:
    • ext{Assets} = ext{Liabilities} + ext{Owner's Equity}
    • ext{Net Income} = ext{Service Revenue} - igl( ext{Salaries Expenses} + ext{Utilities Expenses} + ext{Rent}igr)
  • Normal balance reminders:
    • Assets, Expenses: Debit-oriented
    • Liabilities, Equity, Revenue: Credit-oriented
  • Conceptual takeaway:
    • The list in the transcript represents a standard Chart of Accounts structure used to track financial position and performance across the main categories of business finance.