DEFINITION of 'Accounting Event'

A transaction or change recognized on the financial statements of an accounting entity. Accounting events can be either external or
internal. An external transaction would occur with an outside party, such as the purchase or sales of a good. An internal transaction
would involve changes in the accounting entity's records, such as adjusting an account on the financial statements.
An accounting transaction is a business event having a monetary impact on the financial statements of a business.
It is recorded in the accounting records of the business. Examples of accounting transactions are:

Sale in cash to a customer

Sale on credit to a customer

Receive cash in payment of an invoice owed by a customer

Purchase fixed assets from a supplier

Record the depreciation of a fixed asset over time

Purchase consumable supplies from a supplier

Investment in another business

Investment in marketable securities

Engaging in a hedge to mitigate the effects of an unfavorable price change

Borrow funds from a lender

Issue a dividend to investors

Sale of assets to a third party

There can also be fraudulent accounting transactions that are essentially made up by management or the accounting
staff. These transactions can be avoided through the use of a comprehensive system of controls.
Every accounting transaction has to follow the dictates of the accounting equation, which states that any transaction
must result in assets equaling liabilities plus shareholders' equity. For example:
A sale to a customer results in an increase in accounts receivable (asset) and an increase in revenue

(indirectly increases stockholders' equity).

A purchase from a supplier results in an increase in expenses (indirectly decreases stockholders' equity) and a

decrease in cash (asset).

A receipt of cash from a customer result in an increase in cash (asset) and a decrease in accounts receivable

(asset).

Borrowing funds from a lender results in an increase in cash (asset) and an increase in loans payable
(liability).
Thus, every accounting transaction results in a balanced accounting equation.
Accounting transactions are either directly or indirectly recorded with a journal entry. The indirect variety is created
when you use a module in the accounting software to record a transaction, and the module creates the journal entry
for you. For example, the billing module in the accounting software will debit the accounts receivable account and
credit the revenue account every time you create a customer invoice.
If a journal entry is created directly in a manual accounting system, verify that the sum of all debits equals the sum of
all credits, or the transaction will be unbalanced, which makes it impossible to create financial statements. If a journal
entry is created directly in an accounting software package, the software will refuse to accept the entry unless debits
equal credits.
The 10 elements are: (1) assets, (2) liabilities, (3) equity, (4) investments by owners, (5) distributions to owners, (6)
revenues, (7) expenses, (8) gains, (9) losses, and (10) comprehensive income.
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past
transactions or events. Liabilities are probable future sacrifices of economic benefits arising from present obligations of
a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions
or events. Equity or net assets, called shareholders equity or stockholders equity for a corporation, is the residual
interest in the assets of an entity that remains after deducting liabilities. Investments by owners are increases in
equity resulting from transfers of resources (usually cash) to a company in exchange for ownership interest.
Distributions to owners are decreases in equity resulting from transfers to owners.
A cash dividend paid by a corporation to its shareholders is the most common distribution to owners.
Revenues, gains, expenses, and losses describe changes in equity due to profit-generating transactions.
Revenues are inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods,
rendering services, or other activities that constitute the entitys ongoing major, or central, operations.
Gains are increases in equity from peripheral, or incidental, transactions of an entity. Expenses are outflows or other
using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services,
or other activities that constitute the entitys ongoing major, or central, operations. Losses represent decreases in
equity arising from peripheral, or incidental, transactions of an entity. Comprehensive income is the change in equity
of a business enterprise during a period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those resulting from investments by owners and
distributions to owners.
The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to
each other. The accounting equation for a sole proprietorship is:

The accounting equation for a corporation is:

Assets are a company's resourcesthings the company owns. Examples of assets include cash, accounts receivable, inventory,
prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of
assets must equal the combined amount of liabilities plus owner's (or stockholders') equity.
Liabilities are a company's obligationsamounts the company owes. Examples of liabilities include notes or loans payable, accounts
payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities
can be viewed in two ways:
(1) as claims by creditors against the company's assets, and
(2) a sourcealong with owner or stockholder equityof the company's assets.
Owner's equity or stockholders' equity is the amount left over after liabilities are deducted from assets:
Assets - Liabilities = Owner's (or Stockholders') Equity.
Owner's or stockholders' equity also reports the amounts invested into the company by the owners plus the cumulative net income of
the company that has not been withdrawn or distributed to the owners.
If a company keeps accurate records, the accounting equation will always be "in balance," meaning the left side should always equal
the right side. The balance is maintained because every business transaction affects at least two of a company's accounts. For
example, when a company borrows money from a bank, the company's assets will increase and its liabilities will increase by the same
amount. When a company purchases inventory for cash, one asset will increase and one asset will decrease. Because there are two or
more accounts affected by every transaction, the accounting system is referred to as double-entry accounting.
A company keeps track of all of its transactions by recording them in accounts in the company's general ledger.Each account in the
general ledger is designated as to its type: asset, liability, owner's equity, revenue, expense, gain, or loss account.
We created a visual tutorial to demonstrate how a variety of transactions will affect the accounting equation and the
financial statements. It is available in AccountingCoach PRO along with exam questions that pertain to the
accounting equation.
Balance Sheet and Income Statement
The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet
reports a company's assets, liabilities, and owner's (or stockholders') equity at a specific point in time. Like the accounting equation, it
shows that a company's total amount of assets equals the total amount of liabilities plus owner's (or stockholders') equity.
The income statement is the financial statement that reports a company's revenues and expenses and the resulting net income.
While the balance sheet is concerned with one point in time, the income statement covers atime interval or period of time. The
income statement will explain part of the change in the owner's or stockholders' equity during the time interval between two balance
sheets.
AS SET ACCOUNTS
Cash Cash includes: currency and coins, checks, money orders, bank drafts and demand deposit accounts.
Held for Trading Securities Temporary investments of excess cash which are primarily held for short term gain.
Loans and Receivables include trade receivables and non trade receivables. Trade Receivables are claims against others which arise
in the ordinary course of doing business. Examples are: Trade accounts receivable- these are claims against customers arising from
the provision of services or delivery of goods on credit.
Trade Notes Receivable A note receivables is a written promise from the customer to pay a fixed amount of money on a certain future
date. Being a formal and written document. It offers more security than accounts receivable.
Non Trade Receivables represent all other claims which are not trade. They may be non-trade accounts receivable or non-trade notes
receivable.

Inventories These are assets which are (a) held for sale in the ordinary course of business; (b) in the process of production for such
sale; (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Prepaid Expenses These are expenses paid for by the business in advance. Examples are Prepaid Rent and Prepaid Insurance.
Prepaid expenses are assets when they are paid for. Subsequently, they become expenses.
Long-term Investments An investment is an asset held by an enterprise for the accretion of wealth through capital distribution, such
as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those
obtained through trading relationships. Investments are classified as long term when they are intended to be held for long periods of
time.
Property, Plant and Equipment These are tangible assets held by an enterprise for use in the production or supply of goods or
services, or for rental to others, or for administrative purposes and which are expected to be used during more than one accounting
period. Examples are land, building, transportation and delivery vehicles, furniture and fixtures, machinery and equipment.
Intangible Assets These assets are identifiable, non monetary assets without physical substance. These include patents, copyrights,
licenses, franchises and trademarks.
LIABILITY ACCOUNTS
Accounts Payable This account is the opposite of accounts receivable. Examples include purchasing goods or receiving services for
which the buyer agrees to pay in the near future.
Notes Payable A note payable is like a note receivable, except that this time the enterprise is the one who promises to pay (not the
one who receives the promise)
Accrued Liabilities These are amounts owed to others for unpaid expenses. They are similar to accounts payable, except that
accounts payable are for items which have already been consummated (such as the purchase of goods), while accrued expenses are
for items which are continuing in nature (such as utility services like electricity and water). Examples are salaries payable, interest
payable, taxes payable and accruals for utility expenses.
Unearned Revenues Sometimes the enterprise receives payment before providing its customers with goods or services. This creates
an obligation on the part of the enterprise to deliver goods or provide services. Once the enterprise complies with what is required of it,
the advance collections from customers are already earned and become part of income.
Mortgage Payable This account is used for recording long-term debt(s) of an enterprise for which the company has pledged certain
assets as security for the debt (collateral).
Bonds Payable A bond is a contract between the issuer and the lender specifying the terms of repayment as well as the interest to be
p aid.
EQUITY ACCOUNTS
Equity or Capital is used to record the original and additional investments of the owner of the business entity. Capital is increased by
net income earned during the year. Conversely, a net loss decreases capital.

Withdrawals When the proprietor (or a partner in a partnership) withdraws cash or others assets for non business use, such
withdrawals are reflected in the withdrawals account. Some accounting references use the term drawings or personal instead of
withdrawals
Income Summary It is temporary account used to summarize all income and expenses for a given period. If total income is greater
than total expenses, a net income results. If the opposite happens, a net loss was sustained by the business. Some accounting
references use the term Profit or Loss Summary instead of Income Summary.
INCOME ACCOUNTS
Service Income or Fees Income Revenues earned by performing services for customers.
Sales Revenues earned as a result of sale of merchandise.
EXPENSE ACCOUNTS
Cost of Sales the cost incurred to purchase or to produce the products sold to customers during the period. For a service business,
any expense which could be directly attributed to the provision of services is called cost of services.
Salaries and Wages Expense Includes all payments as a result of an employer-employee relationship such as salaries and wages,
13th mo. pay and other related employee benefits.
Utilities Expense (Telephone, Electricity, Fuel and Water Expenses) Expenses related to use of communication facilities, the
consumption of electricity and water.
Rent Expense Expense for leased office space,, equipment, or other assets rented from others.
Supplies Expense The account used for recording the usage of supplies (e.g. office supplies) in the normal course of business.
Insurance Expense Portions of premiums paid on insurance coverage which has expired.
Depreciation Expense The portion of the cost of a tangible asset allocated or charged as expense during the accounting period.
Bad Debts Expense The amount of receivables estimated to be uncollectible and charged as expense during an accounting period.
Also known as Uncollectible Accounts Expense.
Interest Expense An expense related to use of borrowed funds. Also known as finance cost.