Accounting 101 Essay

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Management 311
Getting Started – Chapter one (LLS)

The problems in this chapter are designed to help you become familiar with the names of the accounts on the various financial statements and to help learn how the financial statements are related to each other.

Step One: Being able to identify which accounts are located on the balance sheet and the income statement.

Examine the balance sheet for Lands End and/or Pacific Sunwear (or use any annual report). If you place the balance sheets side by side, you will notice that most balance sheets contain the similar accounts on the asset, liability, and equity sides. Assets will most likely contain: Cash, Receivables, Inventory, Land, Buildings, etc. Liabilities will contain many accounts that include the term ‘payable’ at the end. These indicate amounts that will be paid in the future. Equity accounts will contain common stock accounts (amounts received from the owners) and retained earnings. The balance in retained earnings is equal the cumulative sum of net income since the firm began less any dividends paid to shareholders.

Step Two: Several of the problems require the use of the accounting equation. This equation (listed below) should always balance.

Assets = Liabilities + Equity

Since net income is closed to retained earnings, which is a component of Equity, you could consider the accounting equation to be:

Assets = liabilities + common stock + beginning balance in retained earnings + net income for the year - dividends declared, or

A = L + CS + Beg. RE + NI - Div Decl

Note that the ending balance in retained earnings is simply:

Ending Retained earnings = beginning balance in retained earnings + net income for the year - dividends declared,
Practice exercise
The following ledger accounts are for the Vishna Service Corporation: a. Cash b. Wages Expense c. Accounts Receivable d. Common Stock e. Service Revenue f. Prepaid Rent g. Accounts Payable h. Investments in Securities i. Income Tax Payable j. Income Tax Expense k. Land l. Supplies Expense m. Prepaid Insurance n. Utilities Expense o. Fees Earned p. Dividends q. Wages Payable r. Unearned Revenue s. Office Equipment t. Rent Payable u. Notes Receivable v. Interest Expense w. Notes Payable x. Supplies y. Interest Receivable z. Rent Expense

Complete the table on the following page using Xs to indicate each account’s classification. The solution is provided on the following page.

| | |Type of Account | |
| | | |Stockholders' Equity | |
| | | |Common | |Retained Earnings |
| |Item | |A|
| | |
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