# LESSON 1-2 How Business Activities Change the Accounting Equation

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LESSON 1-2 How Business Activities Change the Accounting Equation
4/15/2017 LESSON 1-2 How Business Activities Change the Accounting Equation Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

Business activities change the amounts in the accounting equation. Transaction – a business activity that changes assets, liabilities, or owner’s equity Unit of Measurement – business transactions are stated in numbers that have common values LESSON 1-2

REVIEW OF TYPES OF ACCOUNTS
ASSETS Cash Supplies Accounts Receivable Prepaid Insurance Buildings Equipment LIABILITIES Accounts Payable (A/P) Mortgage Payable Notes Payable (N/P) OWNER’S EQUITY (O/E) Capital LESSON 1-2

About Accounts Account – a record summarizing all the information pertaining to a single item in the accounting equation Account Title – the name given to an account Account Balance – the amount in an account Capital – the account used to summarize the owner’s equity in a business LESSON 1-2

The Accounting Equation
You must always keep the accounting equation in balance. ASSETS = LIABILITIES + OWNERS EQUITY LESSON 1-2

RECEIVING CASH FROM THE OWNER
Analyze the transaction: What accounts will the transaction affect? We are receiving cash which is an asset. It is increasing. The owner is investing in the business so they are increasing their equity (owners equity) in the business. LESSON 1-2

LESSON 1-2 4/15/2017 RECEIVING CASH page 10 Transaction 1 August 1. Received cash from owner as an investment, \$5, LESSON 1-2

PAYING CASH FOR SUPPLIES
Analyze the transaction: What accounts will the transaction affect? We are paying cash which is an asset. It is decreasing. We are buying supplies which are assets. Our supplies are increasing. LESSON 1-2

PAYING CASH Transaction 2 August 3. Paid cash for supplies, \$275.00.
LESSON 1-2 4/15/2017 PAYING CASH page 11 Transaction 2 August 3. Paid cash for supplies, \$ Transaction 3 August 4. Paid cash for insurance, \$1, LESSON 1-2

LIABILITY ACCOUNT: ACCOUNTS PAYABLE
It is a common business practice to buy items and pay for them at a future date. Another way to state this activity is to say that these items are bought on account. Since we now owe money to a vendor we have incurred a liability we call Accounts Payable. When we pay the vendor we will be decreasing the amount of money we owe and our liability will decrease. LESSON 1-2

TRANSACTIONS ON ACCOUNT
LESSON 1-2 4/15/2017 TRANSACTIONS ON ACCOUNT page 12 Transaction 4 August 7. Bought supplies on account from Supply Depot, \$ Transaction 5 August 11. Paid cash on account to Supply Depot, \$ LESSON 1-2

TRANSACTIONS ON ACCOUNT
Analyze the transaction: What accounts will the transaction affect? We are buying supplies which is an asset. It is increasing. We now owe money (A/P) to our supply vendor which is a liability. Our accounts payable is increasing. LESSON 1-2

TERMS REVIEW transaction account account title account balance capital
LESSON 1-2 4/15/2017 TERMS REVIEW page 13 transaction account account title account balance capital LESSON 1-2