14. The assets of a business belong to that business entity and there may be claims on the assets. Claims on the assets belong to resource providers.
15. Creditors are individuals and/or institutions that have provided goods or services to the business which are not yet paid for, or loaned money to the business. These parties have first claim to the assets of the business, and the owners have a residual interest in the assets.
16. The term “liabilities” is used to describe creditors' claims on the assets of a business.
17. The accounting equation is:
ASSETS – LIABILITIES = STOCKHOLDERS’ EQUITY
or
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
Assets are the economic resources used by a business for the production of revenue. Liabilities are obligations of a business to relinquish assets, provide services, or accept other obligations. Equity, also called “residual interest” or “net assets,” is the portion of the assets remaining after the creditors' claims have been satisfied (i.e., Assets – Liabilities).
The owners ultimately bear the risk and collect the rewards associated with operating a business.
19. A double-entry bookkeeping system is one in which every transaction affects at least two accounts. A transaction can affect both assets and claims (liabilities and equity) or only assets or only claims. In order to “balance” the accounting equation, every transaction requires a “double entry.”
20. Capital is acquired from owners by issuing stock to them. When stock is issued, the assets of the business increase and the stockholders’ equity increases.
21. Assets that are acquired by issuing common stock are the result of investments by owners. Assets that are acquired by using retained earnings are assets the business acquires through its earnings activities.
22. Revenue increases the asset side of the accounting equation and also increases the retained earnings account in the stockholders’ equity section of the equation.
23. The three primary sources of assets are (1) investments by owners (issue of stock), (2) borrowing from creditors, and (3) earnings activities.
Retained earnings are a result of a business retaining its earned assets, rather than distributing those earnings to its owners.
25. Distributions to owners, called dividends, decrease the asset side of the accounting equation and also decrease the retained earnings account in the stockholders’ equity section of the equation.
26. Dividends and expenses are similar in that they both decrease assets and affect the accounting equation in the same way (i.e. reduction of retained earnings). However, dividends differ from expenses because of the nature of the decline in assets. Expenses reduce assets as the result of a firm's efforts to earn revenue. Dividends reduce assets because of a transfer of wealth to the owners.
27. (1) Income Statement - measures the difference between the asset increases and the asset decreases that were associated with operating a business during a particular accounting period.
Statement of Changes in Stockholders’ Equity - explains the effects of transactions on stockholders’ equity during the accounting period.
(3) Balance Sheet - lists the assets and the corresponding claims against the entity as of a particular date.
(4) Statement of Cash Flows - explains how a company obtained and used cash during the accounting period.
The balance sheet provides information about the enterprise at a particular point in time.
29. A net loss occurs when expenses exceed revenues in a given accounting period.
30. (1) Operating activities - explain the cash generated from revenue and the cash paid for expenses.