Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Kenneth R. Szulczyk

profits in the Retained Earnings account. Subsequently, a corporation can use retained earnings

to finance expansions or pay dividends to investors.

Table 2. A Listing of Assets and Liabilities

Assets Liabilities

Accounts Receivable – Customers owe

money to the business for goods and

services sold on credit

Accounts Payable – Business owes money

to creditors for goods and services

bought on credit.

Buildings and Land Interest payable

Equipment Salaries owed to workers

Cash Taxes payable

Patents and copyrights

Table 3. Stockholders’ Equity

Preferred stock, 2,000 shares authorized, 1,000 share issued and
Outstanding

$250,000

Common stock, 12,000 shares authorized, 10,000 shares
issued and outstanding

$350,000

Total capital contributed by common stockholders $600,000

Retained earnings $80,000
Total stockholders’ equity $ 6 80,000

Accountants divide a company’s assets into current and fixed assets. We show an example

in Table 4 for Stores USA. Current assets include cash, accounts receivable, merchandise

inventory, and prepaid expenses. They are important because a business needs these assets to

operate the daily business. On the other hand, fixed assets include buildings, plants, and

equipment with long life spans. Stores USA has a store and office equipment valued at $25,000

and $4,000 respectively. Accountants subtract the accumulated depreciation from the equipment

because equipment becomes old and deteriorates. Depreciation equals $5,500 for the store

equipment and $1,500 for the office equipment.

Accountants divide The Stores USA liabilities into current liabilities and long-term debt.

Current liabilities are debts and obligations that are less than a year and include accounts

payable, notes payable, and income taxes. Long-term debt includes all debt with maturities

greater than a year such as corporate bonds. Stores USA has no long term liabilities.

Furthermore, the corporation issued 10,000 shares for $50 per share and earned income of

$6,500 under retained earnings listed under Stockholders’ Equity. Board of directors can pay

dividends from this account or finance an expansion of the business. Finally, the total assets

equal the total liabilities plus shareholders’ equity, conforming to Equation 1.