External event: involves interactions between the entity and its environment. * Example: the payment of wages to an employee is an external event, hiring of a sales manager Internal event: occurs entirely within the entity.
* The use of a piece of equipment
Transaction: any event that is recognized in a set of financial statements (if an event is measurable and realized, then it is a transaction) * Typically include:
* An external event that involves exchange of assets, liabilities between the entity and external parties. Like, paying a monthly utility bill, selling merchandise to a customer * An internal event, where the effects on the entity can be reliably measured. Like sing equipment to manufacture a product, incurring losses to natural disaster Source document: a piece of paper that is used as evidence to record a transaction * Any invoice received from a supplier is the source document for a purchase of inventory on credit An inflow of assets resulting from the sale of goods and services by a business is called “revenue”. An increase in revenue will cause an increase in the income period, which in turn results in an increase in the retained earnings. Accounts receivable: a promise from a customer to pay an amount owed (asset) If an agreement to rent out a space is agreed upon and the customers say they will pay later, an accounts receivable is incurred. However, the supposed use of the facilities in this transaction has not yet been provided. Thus, instead of revenue, a liability is increased. Expense: consumption of assets to generate revenue
When an accounts receivable is paid, cash increases and accounts receivable decreases Dividends: when dividends are paid, cash and retained earnings decrease * Dividends are not an expense but a direct reduction of retained earnings Asset: something that the firm owns that has future value
Liability: an obligation owed by the company
Equity: what’s left over...