Menu
Home
Log in / Register
 
Home arrow Accounting arrow Basics of Accounting & Information Processing
< Prev   CONTENTS   Next >

4.3. Edelweiss Provides Services to a Costumer on Account

What would happen if Edelweiss Corporation did some work for a customer in exchange for the customer's promise to pay $5,000? This requires further explanation; try to follow this logic closely! You already know that retained earnings is the income of the business that has not been distributed to the owners of the business. When Edelweiss Corporation earned $5,000 (which they will collect later) by providing a service to a customer, it can be said that they generated revenue of $5,000. Revenue is the enhancement to assets resulting from providing goods or services to customers. Revenue will bring about an increase to income, and income is added to retained earnings. Can you follow that?

As you examine the balance sheet on the top of the next page, notice that accounts receivable and retained earnings went up by $5,000 each, indicating that the business has more assets and more retained earnings. And, guess what: assets still equal liabilities plus equity.

4.4. Edelweiss Pays Expenses With Cash

It would be nice if you could run a business without incurring any expenses. However, such is not the case. Expenses are the outflows and obligations that arise from producing goods and services. Imagine that Edelweiss paid $3,000 for expenses. The lower set of balance sheets on the following page shows this impact.

4.5. Generalizing About the Impact of Transactions

There are countless types of transactions that can occur, and each and every transaction can be described in terms of its impact on assets, liabilities, and equity. What is important to know is that no transaction will upset the fundamental accounting equation of assets = liabilities + owners' equity.

Services to a customer on account:

EDELWEISS CORPORATION Balance Sheet December 31, 20X3 (before indicated transaction)

EDELWEISS CORPORATION Balance Sheet December 31, 20X3 (after indicated transaction)

Assets

Cash

$ 35,000

Assets

Cash

$ 35,000

Accounts receivable

40,000

+ $5,000

Accounts receivable

45,000

Inventories Land Building Equipment Other assets

35,000 125,000 400,000 280,000

10,000

Inventories Land Building Equipment Other assets

35,000 125,000

400,000 280,000

10,000

Total assets

$925 000

+ $5,000

Total assets

$930 000

Liabilities

Accounts payable Loans payable

$ 50,000 155,000

Liabilities

Accounts payable Loans payable

$ 50,000 155,000

Total liabilities

$205,000

+ $0

Total liabilities

$205,000

Stockholders' equity

Capital stock

$120,000

Stockholders' equity

Capital stock

$120,000

Retained earnings Total stockholders' equity

600,000

720,000

+ $5,000 + $5,000

Retained earnings Total stockholders' equity

605,000

725,000

Total liabilities and equity

$925,000

Total liabilities and equity

$930,000

Pays expenses:

EDELWEISS CORPORATION Balance Sheet December 31, 20X3 (before indicated transaction)

EDELWEISS CORPORATION Balance Sheet December 31, 20X3 (after indicated transaction)

Assets

Assets

Cash

$ 35,000

- $3,000

Cash

$ 32,000

Accounts receivable

Inventories

Land

Building

Equipment

Other assets

45,000 35,000

125,000 400,000

280,000 10,000

Accounts receivable

Inventories

Land

Building

Equipment

Other assets

45,000

35,000

125,000

400,000 280,000

10,000

Total assets

$930,000

- $3,000

Total assets

$927 000

Liabilities

Accounts payable Loans payable

$ 50,000 155,000

Liabilities

Accounts payable Loans payable

$ 50,000 155,000

Total liabilities

$205,000

+ $0

Total liabilities

$205,000

Stockholders' equity

Capital stock

$120,000

Stockholders' equity

Capital stock

$120,000

Retained earnings

605,000

- $3,000

Retained earnings

602,000

Total stockholders' equity

725,000

- $3,000

Total stockholders' equity

722,000

Total liabilities and equity

$930 000

Total liabilities and equity

$927 000

4.6. Distinguishing Between Revenue and Income

In day-to-day conversation, some terms can often be used casually and without a great deal of precision. Words may be treated as synonymous, when in fact they are not. Such is the case for the words "income" and "revenue." Each term has a very precise meaning, and you should accustom yourself to the correct usage. It has already been pointed out that revenues are enhancements resulting from providing goods and services to customers. Conversely, expenses can generally be regarded as costs of doing business. This gives rise to another "accounting equation":

Revenues - Expenses = Income

Revenue is the "top line" amount corresponding to the total benefits generated from business activity. Income is the "bottom line" amount that results after deducting the expenses from revenue. In some countries, revenue is also referred to as "turnover."

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel