chapter 3

• Assets are economic resources controlled by a business that have resulted from past events and can provide future economic benefits
• Liabilities are present obligations that have resulted from past events and can require the business to give up resources when settling them
• Equity is assets minus liabilities
• Income includes revenue and gains, representing increases in economic benefits during the period that result in an increase in equity
• Expenses include expenses and losses, representing decreases in economic benefits during the period that result in a decrease in equity
• The balance sheet presents the assets, liabilities, and equity of a business
• The income statement shows the profit or loss of a business
• Common account titles for assets include Cash, Accounts Receivable, Inventory, Land, Building, and Equipment
• Common account titles for liabilities include Accounts Payable, Notes Payable, Interest Payable, Salaries Payable, Utilities Payable, and Unearned Income
• Common account titles for equity include Owner's Capital and Owner's Drawings
• Common account titles for income statement accounts include Service Fee, Sales, Interest Income, and Gains
• Common account titles for expenses include Cost of Sales, Freight-out, Salaries Expense, Rent Expense, and Utilities Expense
• Salaries earned by employees for the services they have rendered during the accounting period
• Rent Expense represents the rental that has been used up during the accounting period
• Utilities Expense represents the cost of utilities (e.g., electricity, water, telephone, internet, cable TV, etc.) that have been used during the accounting period
• Supplies Expense represents the cost of supplies that have been used during the period
• Bad Debt Expense is the amount of estimated loss from uncollectible accounts receivable during the period
• Depreciation Expense is the portion of the cost of a depreciable asset (e.g., building or equipment) that has been allocated to the current accounting period
• Advertising Expense represents the cost of promotional or marketing activities during the period
• Insurance Expense represents the cost of insurance pertaining to the current accounting period
• Taxes and Licenses represent the cost of business and local taxes required by the government for the conduct of business
• Transportation and Travel Expense:

  • Transportation expenses represent the necessary and ordinary cost of employees getting from one workplace to another
  • Travel expenses represent the costs incurred when traveling on business trips
• Interest Expense represents the cost of borrowing money
• Miscellaneous Expense represents various small expenditures which do not warrant separate presentation
• Losses may arise from:

  • Sales of assets, other than inventory, at a sale price that is less than the carrying amount
  • Decreases in the value of assets due to destruction, damage, obsolescence, and other changes in value caused by market factors
• Asset Accounts:

  • Accounts Receivable: Represents money owed by customers
  • Allowance for Bad Debts: Records estimated uncollectible accounts receivable
  • Notes Receivable: Represents written promises to receive money
  • Inventory: Represents goods held for sale
  • Prepaid Supplies: Records the cost of unused supplies
  • Prepaid Rent: Records rent paid in advance
  • Equipment: Records the cost of purchased equipment
• Liability Accounts:

  • Accounts Payable: Represents money owed to suppliers
  • Notes Payable: Represents written promises to pay
  • Interest Payable: Records interest that has not been paid yet
  • Salaries Payable: Represents unclaimed salaries
  • Utilities Payable: Records unpaid utility bills
  • Unearned Income: Represents advances from customers
• Equity Accounts:

  • Owner’s Capital: Represents the owner's investment in the business
  • Owner’s Drawings: Records withdrawals made by the owner
• Income Accounts:

  • Sales: Records revenue from selling goods
  • Interest Income: Records income earned from lending money
• • Insurance Expense: Records the cost of insurance
  • Taxes and Licenses Expense: Records business and local taxes paid
• Expense Accounts:

  • Cost of Sales or Cost of Goods Sold: Records the cost of goods sold
  • Freight-out: Records costs related to delivering goods to customers
  • Salaries Expense: Records employee compensation
  • Rent Expense: Records rent paid for business space
  • Utilities Expense: Records utility costs
  • Supplies Expense: Records the cost of supplies used
  • Bad Debt Expense: Records estimated losses from uncollectible accounts
  • Depreciation Expense: Records the portion of asset cost allocated to the current period
  • Advertising Expense: Records costs for promotional activities
• Loss:

  • Represents expenses arising from unexpected events like asset losses
• An account is a record of the increases and decreases in a specific item of asset, liability, equity, income, or expense

  • Debit is the left side of an account, while credit is the right side
  • The balance of an account is the difference between total debits and total credits
  • The five major accounts are: Assets, Liabilities, Equity, Income, Expense
  • A chart of accounts is a list of all accounts used by the business
  • Account numbers are assigned to each account for recording and retrieval of information
• Post test:

  • Inventory: Represents goods held for sale
  • Rent paid in advance: Records rent paid in advance
  • Supplies Expense: Records the cost of supplies used
  • Balance Sheet: Presents the assets, liabilities, and equity of a business
  • Cost of Goods Sold: Records the cost of goods sold
  • Interest Income: Records interest earned but not yet collected
  • Service Fees: Represents revenues earned from rendering services
  • Sales: Records revenue from selling goods
  • Equity: Represents increases in assets or decreases in liabilities resulting in increases in equity
• Income Statement:

  • Presents the income and expenses, and consequently the profit or loss, of a business
  • Transportation costs of delivering goods to customers are recorded in this account
  • Notes Payable: Represents obligations supported by written promises to pay
  • Prepaid Supplies: Records the cost of unused supplies
  • Unearned Income: Represents amounts received from customers in advance
  • Miscellaneous Expense: Represents various small expenditures
  • Utilities Expense: Records utility expenses
  • Bad Debt Expense: Records estimated losses from uncollectible accounts
• • Depreciation Expense: Records the portion of asset cost allocated to the current period
  • Advertising Expense: Records costs for endorsements
  • Insurance Expense: Records the cost of insurance
  • Taxes and Licenses Expense: Records business and local taxes paid
  • Interest Expense: Records the cost of borrowing money
  • Loss: Represents expenses arising from unexpected events
• Types of Major Accounts:

  • Asset Accounts: Include Accounts Receivable, Allowance for Bad Debts, Notes Receivable, Inventory, Prepaid Supplies, Prepaid Rent, Equipment
  • Liability Accounts: Include Accounts Payable, Notes Payable, Interest Payable, Salaries Payable, Utilities Payable, Unearned Income
  • Equity Accounts: Include Owner’s Capital, Owner’s Drawings
  • Income Accounts: Include Sales, Interest Income
• • Expense Accounts: Include Cost of Sales, Freight-out, Salaries Expense, Rent Expense, Utilities Expense, Supplies Expense, Bad Debt Expense, Depreciation Expense, Advertising Expense, Insurance Expense, Taxes and Licenses Expense, Interest Expense, Loss
• Drills on Account Titles:

  • Accumulated Depreciation – Equipment: Represents the total depreciation expenses recognized since the equipment was acquired
  • Loss: Represents the carrying amount of stolen assets
  • Post test: Tests understanding of major account types