Earned service revenue and received cash

As its first transaction in July Metro performed deliverance services for customers and received USD 4800 cash. This transaction improved an asset (cash) by USD 4800. Stockholders' equity (retained earnings) as well increased by USD 4800 and the accounting equation was in balance.

The USD 4800 is revenue make by the business and as such increases stockholders' equity in the form of retained earnings for the reason that stockholders prosper when the business earns profits. Similarly if the corporation sustains a loss the loss would reduce retained earnings.

Revenues enhance the amount of retained earnings while expenses and dividends decrease them. In this first section we demonstrate all of these items as immediately affecting retained earnings. In later sections the expenses, revenues, and dividends are accounted for separately from retained earnings during the accounting period and are transferred to retained earnings only at the end of the accounting period as part of the closing process. Metro would record enhance in stockholders' equity brought about by the revenue transaction as a separate account retained earnings.

This doesn't increase capital stock because the Capital Stock account increases only when the company issues shares of stock. The hope is that revenue transactions will exceed expenses and yield net income. If net income isn't distributed to stockholders it is in fact retained. Later section illustrate that because of complexities in handling large numbers of transactions revenues and expenses affect retained earnings only at the end of an accounting period. The previous procedure is a shortcut used to explain why the accounting equation remains in balance.