Introduction to Financial Accounting Chapter 2.ppt

* To see an example of how revenue affects the expanded accounting equation, let’s look at the two revenue transactions for Eagle Golf Academy. In transaction (6) , Eagle provides golf training to customers who pay cash at the time of the service, $3,600. Providing training to customers for cash causes both assets and stockholders’ equity to increase. Notice that an increase in service revenue increases stockholders’ equity by increasing the retained earnings account ( + $3,600 ). Therefore, the basic accounting equation remains in balance (Assets = Liabilities + Stockholders’ Equity). * In transaction (7) , other customers receive golf training but promise to pay $2,500 cash at some time in the future. The fact that some customers do not pay cash at the time of the service doesn’t prevent Eagle from recording revenue. Eagle has earned the revenue by providing services. In addition, the right to receive cash from a customer is something of value the company owns, and therefore is an asset. When a customer does not immediately pay for services with cash, we traditionally say the services are performed “on account,” and we record an account receivable. Providing services to customers on account causes both assets and stockholders’ equity to increase. * Companies sometimes receive cash in advance from customers. We’re assuming that Eagle receives $600 from customers for golf training to be provided later. In this case, the company cannot report revenue from training now because it has yet to provide the training to earn those revenues. Instead, the advance payment from customers creates an obligation for the company to perform services in the future, and this future obligation is a liability (or debt), most commonly referred to as unearned revenue. Receiving cash in advance causes both assets and liabilities to increase: * Companies incur a variety of expenses in generating revenues. Eagle Academy incurs salaries expense of $2,800. Paying salaries for the cur