CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 1-2 How Business Activities Change the Accounting Equation

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning RECEIVING CASH A transaction is a business activity that changes assets, liabilities or owner’s equity Ex: a business that pays cash for supplies After each transaction, the accounting equation must stay balanced ACCOUNTING CONCEPT: Unit of Measurement When business transactions are stated in numbers that have common values (a common unit of measurement) In the US, business transactions are recorded in dollars 2 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning RECEIVING CASH Received Cash Investment from Owner An account is a record summarizing all the information pertaining to a single item in the accounting equation The name given to an account is called an account title Each part of the accounting equation consists of one or more accounts The amount in an account is called the account balance The account used to summarize the owner’s equity in a business is called capital 3 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning PAYING CASH Paid Cash for Supplies When changes are made on only one side of the accounting equation, the equation must still be in balance If one account is increased, another account on the same side must be decreased Paid Cash for Insurance Insurance is something of value, therefore it is an asset Insurance premiums are paid in advance, or prepaid, the premiums are recorded in an asset account titled Prepaid Insurance 4 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TRANSACTIONS ON ACCOUNT Bought Supplies on Account It is common for businesses to purchase items and pay for them at a future date, known as buying on account Supply Depot will have a claim on TechKnow’s assets until TechKnow pays for the supplies Accounts Payable is a liability account Paid Cash on Account When cash is paid towards an account payable the amount due is decreased 5 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting Kim Parks uses $5,000 of her own money to invest in TechKnow consulting. How does this investment affect the business records? The asset account, Cash, is increased by $5,000 This increase is on the LEFT side of the accounting equation The owner’s equity account, Capital, is increased by $5,000 This increase is on the RIGHT side of the accounting equation The accounting equation is still balanced 6 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 1-2 RECEIVING CASH Transaction 1 August 1. Received cash from owner as an investment, $5, page 10

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting TechKnow Consulting pays $275 cash for supplies The asset account, Cash, is decreased by $275 This decrease is on the LEFT side of the accounting equation The asset account, Supplies, is increased by $275 This increase is on the LEFT side of the accounting equation The total on the LEFT side is still $5,000 (cash $4,725 + supplies $275) so the equation is still in balance 8 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting TechKnow pays a $1,200 insurance premium for future insurance coverage The asset account, Cash, is decreased by $1,200 This decrease is on the LEFT side of the accounting equation The asset account, Prepaid Insurance, is increased by $1,200 This increase is on the LEFT side of the accounting equation The total on the LEFT side is still $5,000 (cash $3,525 + supplies $275 + $1,200 prepaid insurance) so the equation is still in balance 9 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 1-2 PAYING CASH Transaction 2 August 3. Paid cash for supplies, $ Transaction 3 August 4. Paid cash for insurance, $1, page 11

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting TechKnow Consulting buys $500 of supplies on account from Supply Depot The asset account, Supplies, is increased by $500 This increase is on the LEFT side of the accounting equation The liability account, Accounts Payable, is increased by $500 This increase is on the RIGHT side of the accounting equation The total on the LEFT side has increased to $5,500 (cash $3,525 + supplies $775 + $1,200) AND the balance on the RIGHT side has increased to $5,500 (acct’s pay $500 + capital $5,000) so the equation is still in balance 11 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning TechKnow Consulting TechKnow Consulting sends a check for $300 to Supply Depot The asset account, Cash, is decreased by $300 Decrease is on the LEFT side of the accounting equation The liability account, Accounts Payable, is decreased by $300 This decrease is on the RIGHT side of the accounting equation The total on the LEFT side has decreased to $5,200 (cash $3,325 + supplies $775 + $1,200) AND the balance on the RIGHT side has increased to $5,200 (acct’s pay $200 + capital $5,000) so the equation is still in balance 12 LESSON 1-2

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 13 LESSON 1-2 TRANSACTIONS ON ACCOUNT Transaction 4 August 7. Bought supplies on account from Supply Depot, $ Transaction 5 August 11. Paid cash on account to Supply Depot, $ page 12

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 14 LESSON 1-2 TERMS REVIEW transaction account account title account balance capital page 13

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning WORK TOGETHER 1-2 (PAGE 13) Determining how transactions change an accounting equation Write the answers to the following problem in the working papers. 1.For each transaction, place a plus (+) in the appropriate column if the classification is increased. Place a minus (-) in the appropriate column if the classification is decreased 15 LESSON / + 4--

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 1-2 PRACTICE Complete On Your Own 1-2 on page 13 Complete Application Problem 1-2 online 16 LESSON 1-2