Beginning balance

Effect of revenue

Ending balance

4) As noted above, assets acquired in operating activities are called revenues.

Assets used in the

process of generating revenues are called expenses .

Expenses decrease retained earnings.

Assume Friends Company used $1,000 in assets to earn $3,000 in revenues.

This is an example asset use transaction .

Asset use transactions result in a decrease in an asset account and in one of the claim accounts (liability or equity accounts).

The affect of this asset use transaction (assets and claims decrease) on the basic accounting equation is as follows:

Beginning balance

Effect of expenses

Ending balance

Take a note of how decreases or negative amounts are shown in accounting records.

Instead of prefixing a minus sign ("-"), a number is taken into parenthesis.

This is a common way of showing a decrease in the accounting realm.

5) If a business chooses to transfer part of its assets (retained earnings in particular) to the owners, the transfer is called distribution . Assume Friends Company transfers $500 of assets to its owners.

This is an asset use transaction:

Beginning balance

Effect of distribution

Ending balance

Distribution and expenses both result in decreases in retained earnings and thus, in equity.

The table below is a summary of the effects of the three asset source transactions (events 1 through 3) and two asset use transactions (events 4 and 5):

Beginning balance

Effect of contribution

Effect of borrowing

Effect of revenue

Effect of expenses

Effect of distribution

Ending balance