The balance in the Retained Earnings account represents the total net income of the
corporation over the entire lifetime of the business, less all amounts which have been
distributed to the stockholders as dividends.
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The Accounting CycleCapturing Economic EventsChapter 3The LedgerThe entire group of accounts is kept together in an accounting record called a ledger.CashAccounts PayableCapital StockAccounts are individual records showing increases and decreases.The Use of Accounts Increases are recorded on one side of the T account, and decreases are recorded on the other side.Left or Debit SideRight or Credit SideTitle of AccountA = L + OEASSETSDebit for IncreaseCredit for DecreaseEQUITIESDebit for DecreaseCredit for IncreaseLIABILITIESDebit for DecreaseCredit for IncreaseDebits and credits affect accounts as follows:Debit and Credit EntriesIn an actual accounting system, transactions are initially recorded in the journal.The JournalPosting Journal Entries to the Ledger Accounts Posting simply means updating the ledger accounts for the effects of the transactions recorded in the journal.A = L + OERetained EarningsCapital StockRetained EarningsThe balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends.Accounting PeriodsTime Period PrincipleTo provide users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length.Revenue and ExpensesThe price for goods sold and services rendered during a given accounting period.Increases owners’ equity.The costs of goods and services used up in the process of earning revenue.Decreases owner’s equity.The Matching Principle: When To Record RevenueMatching PrincipleRevenue should be recognized at the time goods are sold and services are rendered.The Matching Principle: When To Record ExpensesMatching PrincipleExpenses should be recorded in the period in which they are used up.The Accrual Basis of AccountingCurrent Accounting PeriodFutureAccounting PeriodJan. 1, 2011Dec. 1, 2011Jan. 1, 2012Dec. 1, 2012Cash is received or paid hereThe income statement reports revenue or expense hereThe income statement reports revenue or expenses hereCash is received or paid hereORBut . . .But . . .Debit and Credit Rules for Revenue and ExpensesEQUITIESDebit for DecreaseCredit for IncreaseExpenses decrease owners’ equity.Revenues increase owners’ equity.EXPENSESCredit for DecreaseDebit for IncreaseREVENUESDebit for DecreaseCredit for IncreaseEQUITIESDebit for DecreaseCredit for Increase Payments to owners decrease owners’ equity.Owners’ investments increase owners’ equity.DIVIDENDSCredit for DecreaseDebit for IncreaseDividendsCAPITAL STOCKDebit for DecreaseCredit for IncreaseEnd of Chapter 3