1. Accounting in Action

2. Lecture Objectives:
State the accounting equation and define each element of the equation
Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.
Describe the financial statements of a proprietorship and explain how they interrelate.

3. Accounting in Action What is Accounting?
The Building Blocks of Accounting
The Basic Accounting Equation
Using the Basic Accounting Equation
Financial Statements
Three activities
Who uses accounting data
Ethics in financial reporting
Generally accepted accounting principles
Assumptions
Assets
Liabilities
Owner’s equity
Transaction analysis
Summary of transactions
Income statement
Owner’s equity statement
Balance sheet
Statement of cash flows

4. The Elements of Accounting Owner’ Equity (Capital)
Assets
Liabilities
Owner’ Equity (Capital)
Revenues
Expenses

5. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned and controlled by a business entity

6. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the creditors, which represent debts of the business

7. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the owners

8. What is a business transaction?
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

9. On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.

10. Chris Clark deposits P25,000 in a bank account in the name of NetSolutions.
Chris Clark, Capital
25,000 Investment by Chris Clark
Cash
25,000 a.
Assets
Owner’s Equity =

11. NetSolutions bought land, P20,000 for cash
Assets =
Owner’s Equity
Cash Land
25,000
Chris Clark, Capital
25,000
Bal. =
b. (20,000) +20,000
Bal. 5,000 20,000 25,000

12. During the month, NetSolutions purchased supplies for P1,350 and agreed to pay the supplier in the near future (on account).
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital =
Bal. 5, , ,000
c ,350 1,350
Bal. 5,000 1,350 20,000 1,350 25,000

13. NetSolutions provided services to customers, earning fees of P7,500 and received the amount in cash.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 5,000 1,350 20,000 1,350 25,000 =
Fees earned
d. 7, ,500
Bal. 12,500 1,350 20,000 1,350 32,500

14. NetSolutions paid the following expenses: wages-P2,125; rent-P800; utilities-P450; and miscellaneous-P275.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 12,500 1,350 20,000 1,350 32,500
e. ( 3,650) (2,125)
( 800)
( 450)
( 275)
Wages
Rent
Util.
Misc. =
Bal. 8,850 1,350 20,000 1,350 28,850

15. NetSolutions paid P950 to creditors during the month.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 8,850 1,350 20,000 1,350 28,850 =
f. ( 950) ( 950)
Bal. 7,900 1,350 20, ,850

16. At the end of the month, the cost of supplies on hand is P550, so P800 of supplies were used.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 7,900 1,350 20, ,850 =
Supplies expense
g. ( 800) ( 800)
Bal. 7, , ,050

17. At the end of the month, Chris withdrew P2,000 in cash from the business for personal use.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 7, , ,050 =
With-drawal
h. (2,000) (2,000)
Bal. 5, , ,050

18. Effects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Decreased by
Increased by
Owner’s investments
Revenues
Net income

19. Accounting reports, called financial statements, provide summarized information to the owner.