Week 1

 Account is to give an explanation of something, to report, to be responsible.  Accounting is analyzing, recording, reporting, and interpreting financial information. ◦ Analyzing: what happened? How is organization affected? ◦ Recording: capturing and entering information. ◦ Reporting: summarize and provide information. ◦ Interpreting: how do all the pieces fit together?  Who uses this information? ◦ Internal users: business personnel (managers and owners) ◦ External users: government, general public, investors

 Sole proprietorship: one owner. Easy to form, owners makes all decisions, could lose personal assets to meet business obligations.  Partnership: owned by more than one person. Share decision making, partners combine skills and resources, partners could lose personal assets to meet business obligations.  Corporation: owned by stockholders. Can be difficult to form. Stockholders not personally liable for debts of corporation. Board of directors hire management team to run the business.

 Service: perform an activity for a fee. ◦ Doctors, lawn care, hotel, airline  Merchandiser: sell products. ◦ Home Depot, Barnes & Noble, JC Penney, Best Buy  Manufacturer: make products. ◦ Ford, General Electric, Nintendo, Motorola

 Assets: things of value that are OWNED. ◦ Cash, equipment, furniture, supplies, etc.  Equity: rights of financial claim to an asset. ASSETS = EQUITIES  Every asset has an owner.

 Owner’s Equity: rights of owner to the assets of the business. Known as Capital.  Liabilities: business buys assets on account. Liability is an obligation to pay in the future. So, some assets the business possesses are actually OWNED by another entity (creditor) until the business pays for them. ASSETS = LIABILITIES + OWNER’S EQUITY

 Assets ◦ Anything of value that is owned. Ex. Cash to buy supplies for the business.  Liabilities ◦ The amount of assets owed by a business  Ex. “Buy” computer equipment on account.  Buy now, pay later.  Owner’s Equity ◦ Owner’s financial interest in the business assets.

ASSETS = LIABILITIES + OWNER’S EQUITY  A business has assets of $150,000 and liabilities of $50,000. What is owner’s equity?  $150,000 = $50,000 + ?  Owner’s Equity = $100,000  How would the equation look? ◦ $150,000 = $50,000 + $100,000

 Business activities that change the accounting equation are called transactions.  After each transaction the accounting equation must remain in balance. ASSETS = LIABILITIES + OWNER’S EQUITY

 Received cash from owner as an investment $10,000 ◦ Cash (asset)  Increases by $10,000 ◦ Capital (Owner’s Equity)  Increase by $10,000  $10,000 = $0 + $10,000  Cash is an asset. Business owner has financial claim to the asset. ASSETS = LIABILITIES + OWNER’S EQUITY

 Paid cash for supplies $750 ◦ Cash (asset)  Decreased by $750 ◦ Supplies (asset)  Increases by $750  Cash: $10,000-$750 = $9,250  Supplies: 0 + $750 = $750  $9,250+ $750 = $0 + $10,000  Exchange one asset for another asset.  Still $10,000 in total assets however the composition of assets has changed. ASSETS = LIABILITIES + OWNER’S EQUITY

 Paid cash for insurance $1,000  Cash (asset) ◦ Decrease by $1,000  Insurance (asset) ◦ Increases by $1,000  Cash: $9,250 - $1000= $8,250  Supplies: = $750  Insurance: $0 + 1,000 = $1,000  Capital (Owner’s Equity) = $10,000  $8,250 + $750 + $1,000 = $0 + $10,000  Insurance is usually prepaid and covers business in the event of fire, theft, etc. ASSETS = LIABILITIES + OWNER’S EQUITY

 Business “buys” supplies on account for $250  Supplies (asset) ◦ Increases $250  Accounts Payable (Liability) ◦ Increases by $250  Cash: $8,250  Supplies: $750 + $250 = $1,000  Insurance: $1,000  Liabilities: 0 + $250 = $250  Capital (Owner’s Equity) = $10,000  $8,250 + $1,000 + $1,000 = $250 + $10,000  Accounts Payable reflects the obligation that business OWES payment on assets. ASSETS = LIABILITIES + OWNER’S EQUITY

 Paid cash on account $150  Cash (asset) ◦ Decrease $150  Accounts Payable (Liability) ◦ Decreases by $150  Cash: $8,250 - $150 = $8,100  Supplies: $1,000  Insurance: $1,000  Liabilities: $250 - $150 = $100  Capital (Owner’s Equity) = $10,000  $8,100 + $1,000 + $1,000 = $100 + $10,000 ASSETS = LIABILITIES + OWNER’S EQUITY

 Revenue – generated when business makes a sale, INCREASES OWNER’s EQUITY ◦ After all, revenue generated from business operations belongs to the owner, right?  Cash Sale: customer pays business at time of sale  Sale on Account: customer does NOT pay at time of sale but pays business in future. ◦ Since no cash received from customer this sale creates an asset called Accounts Receivable.

 Business earns $1,000 in cash sales (REVENUE)  Cash (asset) increases $1,000 ◦ $8,100 + $1,000 = $9,100  Capital (Owner’s Equity) increases $1,000 ◦ $10,000 + $1,000 = $11,000 ◦ The $1,000 is revenue generated from business operations  $9,100 + $1,000 + $1,000 = $100 + $11,000 ASSETS = LIABILITIES + OWNER’S EQUITY

 Business sells $750 of services on account (REVENUE)  Accounts Receivable (asset) increases $750 ◦ $0 + $750 = $750  Capital (Owner’s Equity) increases $750 ◦ $11,000 + $750 = $11,750 ◦ The $750 is revenue generated from business operations even though the customer did not actually pay yet.  $9,100 + $750 + $1,000 + $1,000 = $100 + $11,750 ASSETS = LIABILITIES + OWNER’S EQUITY

 Expense – a cost incurred in operating the business, DECREASES OWNER’S EQUITY  Expenses are paid in order to support the running of the business which in turn helps to generate revenue. ◦ Rent expense ◦ Utilities expense: electricity, water, gas, etc. ◦ Advertising expense: promote business ◦ Telephone expense ◦ Salary expense: pay employees

 Paid $500 for rent  Cash (asset) decreases $500 ◦ $9,100 - $500 = $8,600  Capital (Owner’s Equity) decreases $500 ◦ $11,750 - $500 = $11,250 ◦ Using the business owner’s asset to pay an expense.  $8,600 + $750 + $1,000 + $1,000 = $100 + $11,250 ASSETS = LIABILITIES + OWNER’S EQUITY

 Customer pays $750 on account  Cash (asset) increases $750 ◦ $8,600 + $750 = $9,350  Accounts Receivable (assets) decreases $750 ◦ $750 - $750 = $0 ◦ Revenue was previously recognized at time of sale. Customer is paying an amount they owe business for prior sale on account.  $9,350 + $0 + $1,000 + $1,000 = $100 + $11,250 ASSETS = LIABILITIES + OWNER’S EQUITY

 Owner withdraws $1,000 from business.  Withdrawals signify assets taken out of the business by the owner for personal use that do NOT relate to the business.  Cash (asset) decreases $1,000 ◦ $9,350 - $1,000 = $8,350  Capital (Owner’s Equity) decreases $1,000 ◦ $11,250 - $1,000 = $10,250 ◦ Owner taking asset OUT of business. Since asset no longer in business the owner no longer has equity.  $8,350 + $0 + $1,000 + $1,000 = $100 + $10,250 ASSETS = LIABILITIES + OWNER’S EQUITY

Assets = Liabilities + Owner’s Equity + Revenue – Expenses – Withdrawals  As revenue increases owner’s equity increases  As expenses increase owner’s equity decreases  As withdrawals increase owner’s equity decreases

 What accounts are affected?  Classify the accounts. ◦ Asset? Liability? Owner’s Equity?  Determine if account is increasing or decreasing.  Does accounting equation remain in balance? ◦ Does left side equal right side?

Questions?