This chapter addresses several topics that are important to developing a working knowledge of financial accounting. Overall, five topics are addressed: changes in the equity account, depreciation accounting, inventory accounting, accounting for leases, and intercorporate investments. We will focus on the importance of these topics to a conceptual understanding of accounting as a financial-information system.
In the previous chapters, it was demonstrated that the majority of changes in the equity account are the result of earning revenue or incurring expenses. Other changes in the equity account are also possible. The two most common changes are the result of owners' contributions of additional equity capital and owners' capital withdrawals or profit distributions.
The nature of equity account changes is the same regardless of the organizational form of a given firm, but the organizational form does affect the method of accounting for a change. For a sole proprietorship or a partnership, contributions of additional equity capital normally take the form of direct cash (or occasionally some other assets) contributions to the firm. The amount of the contribution is reflected as a direct increase in the owner's capital account for a sole proprietor, or as an increase in one or more partners' capital accounts for a partnership. For example, if Tommy Termite should find that his business requires an additional $5,000 cash for