Chapter 1 Introduction to Accounting and Business

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objectivity concept (8) public accounting (6) sales (11)

owner’s equity (9) ratio of liabilities to Securities and Exchange
partnership (7) stockholders’ equity (21) Commission (SEC) (6)
prepaid expenses (11) rent revenue (11) service business (2)
private accounting (4) retained earnings (13) statement of cash flows (15)
profit (2) retained earnings statement (15) stockholders’ equity (9)
proprietorship (7) revenue (11) unit of measure concept (8)

Illustrative Problem

Cecil Jameson, Attorney-at-Law, is organized as a corporation and operated by Cecil Jame-

son. On July 1, 2013, the company has the following assets, liabilities, and capital stock:
cash, $1,000; accounts receivable, $3,200; supplies, $850; land, $10,000; accounts payable,
$1,530; capital stock, $10,000. Office space and office equipment are currently being rent-
ed, pending the construction of an office complex on land purchased last year. Business
transactions during July are summarized as follows:
a. Received cash from clients for services, $3,928.
b. Paid creditors on account, $1,055.
  c. Received cash from Cecil Jameson as an additional investment in exchange for capital
stock, $3,700.
d. Paid office rent for the month, $1,200.
e. Charged clients for legal services on account, $2,025.
 f. Purchased supplies on account, $245.
g. Received cash from clients on account, $3,000.
h. Received invoice for paralegal services from Legal Aid Inc. for July (to be paid on
August 10), $1,635.
 i. Paid the following: wages expense, $850; utilities expense, $325; answering service
expense, $250; and miscellaneous expense, $75.
 j. Determined that the cost of supplies on hand was $980; therefore, the cost of sup-
plies used during the month was $115.
k. Paid dividends, $1,000.

Instructions
1. Determine the amount of retained earnings as of July 1, 2013.
2. State the assets, liabilities, and stockholders’ equity as of July 1 in equation form
similar to that shown in this chapter. In tabular form below the equation, indicate
the increases and decreases resulting from each transaction and the new balances
after each transaction.
3. Prepare an income statement for July, a retained earnings statement for July, and a
balance sheet as of July 31, 2013.
4. (Optional). Prepare a statement of cash flows for July.

Solution
1.
Assets − Liabilities = Stockholders’ Equity
($1,000 + $3,200 + $850 + $10,000) − $1,530 = Capital Stock + Retained Earnings
$15,050 − $1,530 = $10,000 + Retained Earnings
$3,520 = Retained Earnings