indicate to which category of elements of financial statements it belongs

For each item below, indicate to which category of elements of financial statements it belongs.

(a) Retained earnings

(b) Sales

(c) Additional paid-in capital

(d) Inventory

(e) Depreciation

(f) Loss on sale of equipment

(g) Interest payable

(h) Dividends

(i) Gain on sale of investment

(j) Issuance of common stock

The Correct Answer and Explanation is :

Here are the categories for each item in financial statements:

(a) Retained earnings – Equity
(b) Sales – Revenue
(c) Additional paid-in capital – Equity
(d) Inventory – Asset
(e) Depreciation – Expense
(f) Loss on sale of equipment – Expense
(g) Interest payable – Liability
(h) Dividends – Equity (distribution to shareholders, not an expense)
(i) Gain on sale of investment – Revenue (or Other Income)
(j) Issuance of common stock – Equity

Explanation:

Financial statements consist of several elements: assets, liabilities, equity, revenues, and expenses. Each of the above items fits into one of these categories based on its financial nature.

1. Retained earnings is part of equity and represents accumulated profits that have not been distributed as dividends. It grows with net income and decreases with losses or dividend payments.
2. Sales is classified under revenue as it represents the earnings generated from selling goods or services.
3. Additional paid-in capital is an equity component, referring to the excess amount shareholders pay over the par value of stock.
4. Inventory is an asset because it represents goods held for sale, which will eventually generate revenue.
5. Depreciation is an expense that accounts for the reduction in value of fixed assets over time due to wear and tear.
6. Loss on sale of equipment is an expense recognized when assets are sold for less than their book value.
7. Interest payable is a liability as it represents amounts owed for borrowed funds.
8. Dividends are a distribution of equity rather than an expense, as they represent payments to shareholders from retained earnings.
9. Gain on sale of investment is categorized as revenue (or other income) since it represents earnings from selling investments at a profit.
10. Issuance of common stock increases equity since it represents funds received in exchange for ownership shares.