AFM101 Chapter Notes - Chapter 2: Double-Entry Bookkeeping System, Accounting Equation, Retained Earnings

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lilacmouse857

7 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

For unlimited access to Textbook Notes, a Class+ subscription is required.

AFSA Education

Shaeholdes’ euity oes’ euity, stokholdes’ euity

- Capital gains – shareholders that sell their investment for more money than they paid

1. Contributed Capital

o Results from shareholders providing cash (and sometimes other assets) to the business

2. Retained Earnings

o The accumulated earnings of a company that are not distributed to the shareholders

and are reinvested in the business

What Types of Business Activities Cause Changes in Financial Statement Amounts?

- Transaction

o An exchange between a business and one or more external parties to a business (not an

exchange of promises) or (2) a measurable internal event, such as adjustments for the

use of assets in operations

- Account

o Is a standardized format that organizations use to accumulate the monetary effects of

transactions on each financial statement item

How Do Transactions Affect Accounts?

- Transaction Analysis – the process of studying a transaction to determine its economic effect on

the entity in terms of the accounting equation

- Accounting equation must remain in balance after each transaction (A = L+SE)

- Dual effects

o Every transaction has at least two effects on the basic accounting equation

How Do Companies Keep Track of Accounting Balances?

T-account

- a tool for summarizing transaction effects for each account, determining balances, and drawing

ifeees aout a opay’s atiities

o Debit is on the left side

o Credit is on the right side

- Assets accounts increase on the debit (left) side

- Liabilities and SE increase on the credit (right) side

Journal Entries

- An account method for expressing the effects of a transaction on various accounts, using the

double entry bookkeeping system

Journal Entry

Date

Account Name

Debit

Credit

2015

December 13

Debited Account

Credited Account

$$$

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Document Summary

Transaction: an exchange between a business and one or more external parties to a business (not an exchange of promises) or (2) a measurable internal event, such as adjustments for the use of assets in operations. Is a standardized format that organizations use to accumulate the monetary effects of transactions on each financial statement item. Transaction analysis the process of studying a transaction to determine its economic effect on the entity in terms of the accounting equation. Accounting equation must remain in balance after each transaction (a = l+se) Dual effects: every transaction has at least two effects on the basic accounting equation. T-account a tool for summarizing transaction effects for each account, determining balances, and drawing i(cid:374)fe(cid:396)e(cid:374)(cid:272)es a(cid:271)out a (cid:272)o(cid:373)pa(cid:374)y"s a(cid:272)ti(cid:448)ities: debit is on the left side, credit is on the right side. Assets accounts increase on the debit (left) side. Liabilities and se increase on the credit (right) side.

Related Questions

At the end of 2017, Jeffco Inc. had the following equity accounts and balances:

Common shares, no par (175,000 shares issued and outstanding)	$1,926,400
Retained earnings	310,000

During 2018, Jeffco engaged in the following transactions involving its equity accounts:

Issued 8,000 common shares for $35 per share.

Issued 1,000 shares of 9%, $120 stated value preferred shares at $125 per share.

Declared and paid cash dividends of $15,000.

Repurchased and cancelled 500 common shares for $52 per share.

Required:

1. Prepare the journal entries for a through d. For a compound transaction, for those boxes in which no entry is required, leave the box blank.

a. 2018	Cash
	Common Shares
	(Record issue of common shares)
b.	Cash
	Preferred Shares
	Contributed Surplus-Preferred Shares
	(Record issue of preferred shares)
c.	Retained Earnings (or Dividends)
	Cash
	(Record declaration and payment of dividends)
d.	Retained Earnings
	Common Shares
	Cash
	(Record repurchase of common shares)

2. Assume that 2018 net income was $89,600. Prepare a partial statement of financial position showing only the shareholders' equity section at December 31, 2018.

Jeffco, Inc.
Statement of Financial Position (Partial)
December 31, 2018
Shareholders' equity:
Preferred shares, 9%, $120 stated value	$
Common shares, no par
Contributed surplus:
Preferred shares
Total capital stock
Retained earnings
Total shareholders' equity	$

cerisesnake518

At the end of 2017, Jeffco Inc. had the following equity accounts and balances:

Common shares, no par (175,000 shares issued and outstanding)	$1,926,400
Retained earnings	310,000

During 2018, Jeffco engaged in the following transactions involving its equity accounts:

Issued 8,000 common shares for $35 per share.

Issued 1,000 shares of 9%, $120 stated value preferred shares at $125 per share.

Declared and paid cash dividends of $15,000.

Repurchased and cancelled 500 common shares for $52 per share.

Required:

1. Prepare the journal entries for a through d. For a compound transaction, for those boxes in which no entry is required, leave the box blank.

a. 2018	Cash
	Common Shares
	(Record issue of common shares)
b.	Cash
	Preferred Shares
	Contributed Surplus-Preferred Shares
	(Record issue of preferred shares)
c.	Retained Earnings (or Dividends)
	Cash
	(Record declaration and payment of dividends)
d.	Retained Earnings
	Common Shares
	Cash
	(Record repurchase of common shares)

2. Assume that 2018 net income was $89,600. Prepare a partial statement of financial position showing only the shareholders' equity section at December 31, 2018.

Jeffco, Inc.
Statement of Financial Position (Partial)
December 31, 2018
Shareholders' equity:
Preferred shares, 9%, $120 stated value	$
Common shares, no par
Contributed surplus:
Preferred shares
Total capital stock
Retained earnings
Total shareholders' equity	$

taupewildebeest962

Assets	=	Liabilities + Equity
The left side of the accounting equation shows the economic resources of the company (what the company has).	=	The right side of the accounting equation summarizes who provided those assets: Creditors or the owners.

When a business is first formed, both sides of the equation are equal to zero. As transactions occur, they affect the accounting equation, but the accounting equation must always stay in balance. A transaction can increase both sides or decrease both sides. A transaction could also affect only one side by increasing and decreasing one side at the same time.

APPLYING THE CONCEPTS: Analyzing Changes to Assets, Liabilities and Equity

Thomas Company: The table below demonstrates the effect of the first three transactions for Thomas Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers. If an updated balance is zero, enter "0".

Transaction	Assets	=	Liabilities	+	Equity
Beginning	$0	=	$0	+	$0
Investment in the Business The owner of the company has invested $26,000 cash into the business. This increases the assets of the business from its zero balance. The owner has a claim on the assets, so equity also increases from its zero balance. Make sure the equation stays in balance.	$	=	$	+	$
Borrow Cash The company borrows $13,000 cash from the local bank. This increases the assets from its balance after the first transaction. The company now owes the bank; therefore, the bank also has a claim on the assets. Thus, liabilities increase from their zero balance. Notice this transaction did not affect equity. The equation still needs to balance.	$	=	$	+	$
Purchase equipment The company pays cash for a piece of equipment costing $10,000. Make sure that the equation stays in balance. Remember, the left side of the equation summarizes the total assets. The company has merely exchanged one asset (cash) for another asset (equipment); the value of each asset is the same.	$	=	$	+	$

Jones Company: Analyze the accounting equation for another business, Jones Company. Assume that the assets are $66,000 and the liabilities are $26,400. By rearranging the accounting equation, you determine that equity is $.

During the year, the owner invested an additional $4,000 in the business. The company also paid off $2,500 of its debt. What would the accounting equation look like at the end of the year for Jones Company? Enter the updated amounts for Jones' accounting equation below.

Assets	=	Liabilities	+	Equity
$	=	$	+	$

APPLYING THE CONCEPTS: Analyzing the Effect of Revenues and Expenses

The equity component of the accounting equation can be affected by more than owner contributions. In any form of business, the owners take all revenues and expenses. Therefore, equity increases for revenue earned and decreases for expenses incurred. Also in any form of business, money can be distributed from the business to the owners. Distributions (in the form of cash or other assets) to the owner decrease the equity account. Smith Company had transactions affecting equity during the past year. The table below demonstrates the effect of these transactions for Smith Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers.

Transaction	Assets	=	Liabilities	+	Equity
Beginning of the year	$320,000	=	$96,000	+	$224,000
Revenues earned: During the year, Smith Company earned revenues totalling $192,000. The cash has been collected from the customers for all revenue earned this year.	$	=	$	+	$
Expenses incurred: Smith Company incurred expenses totalling $134,400 during that same year. All of the expenses incurred this year were paid in cash.	$	=	$	+	$
Distributions: At the end of each quarter, the owner withdraws cash from Smith Company. The sum of those quarterly distributions was $5,760.	$	=	$	+	$

APPLYING THE CONCEPTS: Putting it all together

Letâs put all the pieces together now. Suppose that you are analyzing Martin Company. You know that at the beginning of the year, the assets equaled $320,000 and the liabilities equaled $176,000. During the year, assets increased by $48,000 and equity increased by $74,400. The change in equity includes all increases and decreases. Further analysis reveals that the changes in equity were caused by revenues of $172,800 and expenses totaling $112,320 during the year, and additional ownersâ investments of $50,400 in the first half of the year. Because of your understanding of the accounting equation, you realize that distributions (withdrawals) to the owner must have also occurred during the year. However, you must determine the amountfor those distributions.

What is the amount of distributions made to the owner of Martin Company during the year? $

Complete the equation below with amounts for the end of the year.

Assets	=	Liabilities	+	Equity
$	=	$	+	$

cyanbee498

AFM101 Chapter Notes - Chapter 2: Double-Entry Bookkeeping System, Accounting Equation, Retained Earnings

AFM101 Full Course Notes

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