# They form businesses so their assets can generate

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Chapter 3 / Exercise 66
Intermediate Algebra Within Reach
Larson
Expert Verified
existing assets. They form businesses so their assets can generate greater amounts of assets. Thus,a business increases its assets by providing goods or services to customers. The results of theseactivities appear in the income statement. The section that follows shows more of Metro’stransactions as it began earning revenues and incurring expenses.
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Chapter 3 / Exercise 66
Intermediate Algebra Within Reach
Larson
Expert Verified
Transactions affecting the income statement and/or balance sheetTo survive, a business must be profitable. This means that the revenues earned by providinggoods and services to customers must exceed the expenses incurred.In July 2010, Metro Courier, Inc., began selling services and incurring expenses. Theexplanations of transactions that follow allow you to participate in this process and learn thenecessary accounting procedures.1b. Earned service revenue and received cashAs its first transaction in July, Metro performed delivery services for customers and receivedUSD 4,800 cash. This transaction increased an asset (cash) by USD 4,800. Stockholders’ equity(retained earnings) also increased by USD 4,800, and the accounting equation was in balance.The USD 4,800 is a revenue earned by the business and, as such, increases stockholders’ equity(in the form of retained earnings) because stockholders prosper when the business earns profits.Likewise, if the corporation sustains a loss, the loss would reduce retained earnings.Revenues increase the amount of retained earnings while expenses and dividends decreasethem. (In this first chapter, we show all of these items as immediately affecting retained earnings.In later chapters, the revenues, expenses, and dividends are accounted for separately from retainedearnings during the accounting period and are transferred to retained earnings only at the end ofthe accounting period as part of the closing process described in Chapter 4.) The effects of thisUSD 4,800 transaction on the financial position of Metro are:Metro would record the increase in stockholders’ equity brought about by the revenuetransaction as a separate account, retained earnings. This does not increase capital stock becausethe Capital Stock account increases only when the company issues shares of stock. The expectationis that revenue transactions will exceed expenses and yield net income. If net income is notdistributed to stockholders, it is in fact retained. Later chapters show that because of complexitiesin handling large numbers of transactions, revenues and expenses affect retained earnings only atthe end of an accounting period. The preceding procedure is a shortcut used to explain why theaccounting equation remains in balance.Assets=Liabilities +Stockholders' EquityTransactionExplanationCashAccountsReceivableTrucksOfficeEquipmentAccountsPayableNotesPayableCapital +StockRetainedEarningsBeginning balances (Exhibit 2)\$ 13,500\$ -0-\$ 20,000\$ 2,500 =\$ -0-\$ 6,000\$ 30,000\$ -0-1bEarned service revenueand received cash4,8004,800Balances after transaction\$ 18,300\$ 20,000\$ 2,500 =\$ 6,000+ \$ 30,000\$ 4,800Increasedby\$4,800Increasedby\$4,8002b. Service revenue earned on account (for credit)