Page 34 - Accounting Principles (A Business Perspective)

1. Accounting and its use in business decisions

Retained -0-
earnings, July 1
Add: Net
income for July (A)2,100
Retained $
earnings, July 2,100
31 (B)

C. Balance Sheet
METRO COURIER, INC.
Balance Sheet
2010 July 31
Assets Liabilities and Stockholder's Equity
Cash $ 15,500 Liabilities:
Account receivables 700 Accounts payable $ 600
Trucks 20,000 Notes payable 6,000
Office equipment 2,500 Total liabilities $ 6,600
Stockholders equity:
Capital stock $ 30,000
Retained earnings (B)2,100
Total stockholders' equity $ 32,100
Total assets $ 38,700 Total liabilities and stockholders' equity $ 38,700
Exhibit 2:
Next, Metro carries this USD 2,100 ending balance in retained earnings to the balance sheet (Part C). If there
had been a net loss, it would have deducted the loss from the beginning balance on the statement of retained

earnings. For instance, if during the next month (August) there is a net loss of USD 500, the loss would be deducted
from the beginning balance in retained earnings of USD 2,100. The retained earnings balance at the end of August
would be USD 1,600.
Dividends could also have affected the Retained Earnings balance. To give a more realistic illustration, assume
that (1) Metro Courier, Inc.’s net income for August was actually USD 1,500 (revenues of USD 5,600 less expenses

of USD 4,100) and (2) the company declared and paid dividends of USD 1,000. Then, Metro’s statement of retained
earnings for August would be:
METRO COURIER, INC.
Statement of Retained Earnings
For the Month Ended 2010 August 31
Retained earnings, August 1.......................... $2,100
Add: Net income for August..................... 1,500
Total.......................................... $3,600
Less: Dividends................................... 1,000
Retained earnings, August 31........................ $2,600
The balance sheet, sometimes called the statement of financial position, lists the company’s assets, liabilities,
and stockholders’ equity (including dollar amounts) as of a specific moment in time. That specific moment is the
close of business on the date of the balance sheet. Notice how the heading of the balance sheet differs from the
headings on the income statement and statement of retained earnings. A balance sheet is like a photograph; it

captures the financial position of a company at a particular point in time. The other two statements are for a period
of time. As you study about the assets, liabilities, and stockholders’ equity contained in a balance sheet, you will
understand why this financial statement provides information about the solvency of the business.
Assets are things of value owned by the business. They are also called the resources of the business. Examples
include cash, machines, and buildings. Assets have value because a business can use or exchange them to produce

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