In the last video, you were introduced
to the common account names for both assets and liabilities.
In this video, we're going to start with equity.
If you've watched my past videos,
you already know that equity is the wealth that a business owes
to the owners.
It is the leftover residual amount
of assets that are left after all the liabilities have
been paid.
It is made up of only two accounts, what
the owners invested in the business plus all the profit
that the business made, which the business has kept.
The first account in equity is owner's capital,
the amount the owners invest when they started the business.
When the business gets cash from their owner,
it increases the owner's capital account.
It's rare for an owner's capital account to be decreased,
so we're going to ignore that right now.
The second account in equity is retained earnings, the earnings
or profit that will be retained in the business
for future development and growth.
Retained earnings is always increased
by the profit a business makes, and it's always
decreased by the dividends that are paid out to the owners
from that profit.
That's it for the two equity accounts.
We only have two more financial reporting elements left,
and the next one is revenues.
Remember, from my previous videos,
that revenues are earned-- meaning
the business has done what they were supposed
to do for their customers, either provided a service
or delivered a good.
It's really important to notice that businesses only
record revenue in their revenue accounts
when their work is done.
When they finish their work, revenues increased.
But if they have to refund their customers,
then revenue is decreased.
There are two main revenue accounts,
the first being service revenue, which
is used when the business is a service business
and provides services like mowing their customer's lawn.
When the service is provided-- notice
the past tense-- the service revenue account increases.
If the business did not do a good job,
then they might have to refund their customer, which
will decrease the service revenue account.
Similarly, if the business provides goods,
then the business will record their revenue
in a sales revenue account.
When they have delivered the good, the account increases.
But if they have to refund their customer's money,
then the sales revenue account is decreased by the refund.
Pretty basic for revenue accounts,
so we only have one financial reporting element left--
expenses.
Remember that expenses are the costs of resources
that the business has used, consumed, or incurred in order
to help them generate revenue.
Again, expenses are only recorded
when there are costs that have already happened in the past.
The biggest issue is how to record expenses
when they happened.
Should they be recorded as a plus because they
increase or a negative because they decrease profit?
That totally depends on whether the business
is using the basic equation or the expanded accounting
equation.
Check back to Chapter 2 for a refresher
if you don't know the answer to this conundrum right now.
We won't go through individual expense accounts
because they all have the same characteristics.
They must be used, consumed, or incurred
to help generate revenue.
Instead, here is a listing of some
of the more common expense accounts such as advertising,
wages, interest, and rent.
The number of expense accounts totally
depends on what information is needed for decision making,
so a business may have many accounts that
categorize expenses so they know exactly what the costs
of generating revenue is.
We have now completed the common accounts
under each of the financial reporting elements.
In our next video, we'll analyze business transactions using
the basic accounting equation and the account names
you were just introduced to.