Overview

This topic examines liabilities—obligations owed to others—and owner’s equity—the residual interest in the company’s assets. You’ll learn how to classify and account for both current and long-term liabilities, stockholder equity, and retained earnings.

Key Concepts and Accounts

• Current Liabilities: Obligations due within one year, including:
  • Accounts Payable
  • Accrued Expenses
  • Unearned Revenue
  • Short-Term Notes Payable
• Long-Term Liabilities: Obligations not due within one year (e.g., Bonds Payable, Long-Term Notes)
• Contingent Liabilities: Potential liabilities based on the outcome of future events (e.g., lawsuits)
• Owner’s Equity (Sole Proprietor/Partnership): Includes Capital and Drawings accounts
• Stockholders’ Equity (Corporation):
  • Common Stock and Preferred Stock
  • Additional Paid-in Capital
  • Retained Earnings
  • Treasury Stock (contra-equity account)
• Dividends: Distribution of earnings to shareholders; reduce retained earnings

Step-by-Step Example

Problem: A company issues 1,000 shares of $1 par value common stock for $12 per share. What is the journal entry?

Step 1: Calculate total proceeds: 1,000 × $12 = $12,000

Step 2: Record par value: 1,000 × $1 = $1,000

Step 3: Allocate remainder to additional paid-in capital: $11,000

  Date        Account                      Debit      Credit
  Jan 1       Cash                         12,000
              Common Stock                             1,000
              Additional Paid-in Capital              11,000
      

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