Page 43 - Accounting Principles (A Business Perspective)

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Assets =Liabilities + Stockholders' +Equity
Office
Cash Accounts Receivable Trucks Accounts Payable Notes Payable Capital + Stock Retained Earnings
Equipment
$ 15,500 $ 700 $ 20,000 $ 2,500 = $ 6,000 $ 30,000 $ 2,700
600 (600)
$ 15,500 $ 700 $ 20,000 $ 2,500 = $ 600 $ 6,000 + $ 30,000 $ 2,100

Increased by Decreased by
$600 $600
Summary of balance sheet and income statement transactions

Part A of Exhibit 4 summarizes the effects of all the preceding transactions on the assets, liabilities, and
stockholders’ equity of Metro Courier, Inc., in July. The beginning balances are the ending balances in Part A of
Exhibit 2. The summary shows subtotals after each transaction; these subtotals are optional and may be omitted.
Note how the accounting equation remains in balance after each transaction and at the end of the month.
The ending balances in each of the columns in Part A of Exhibit 4 are the dollar amounts in Part B and those
reported earlier in the balance sheet in Part C of Exhibit 3. The itemized data in the Retained Earnings column are
the revenue and expense items in Part C of Exhibit 4 and those reported earlier in the income statement in Part A of

Exhibit 3. The beginning balance in the Retained Earnings column (USD 0) plus net income for the month (USD
2,100) is equal to the ending balance in retained earnings (USD 2,100) shown earlier in Part B of Exhibit 3.
Remember that the financial statements are not an end in themselves, but are prepared to assist users of those
statements to make informed decisions. Throughout the text we show how people use accounting information in
decision making.
Dividends paid to owners (stockholders)

Stockholders’ equity is (1) increased by capital contributed by stockholders and by revenues earned through
operations and (2) decreased by expenses incurred in producing revenues. The payment of cash or other assets to
stockholders in the form of dividends also reduces stockholders’ equity. Thus, if the owners receive a cash dividend,
the effect would be to reduce the retained earnings part of stockholders’ equity; the amount of dividends is not an
expense but a distribution of income.

An ethical perspective:
State university

James Stevens was taking an accounting course at State University. Also, he was helping companies
find accounting systems that would fit their information needs. He advised one of his clients to
acquire a software computer package that could record the business transactions and prepare the

financial statements. The licensing agreement with the software company specified that the basic
charge for one site was USD 4,000 and that USD 1,000 must be paid for each additional site where
the software was used.
James was pleased that his recommendation to acquire the software was followed. However, he was
upset that management wanted him to install the software at eight other sites in the company and
did not intend to pay the extra USD 8,000 due the software company. A member of management
stated, “The software company will never know the difference and, besides, everyone else seems to

be pirating software. If they do find out, we will pay the extra fee at that time. Our expenses are high

Accounting Principles: A Business Perspective 44 A Global Text