1. University of 6th of October, Egypt
Prepared by
Dr.Hassan Sweillam
University of 6th of October, Egypt

2. 2 Accounting in Action Learning Objectives
After studying this chapter, you should be able to:
[1] State the accounting equation, and define its components.
[2] Analyze the effects of business transactions on the accounting equation.

3. The Basic Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Provides the underlying framework for recording and summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
LO 6 State the accounting equation, and define its components.

4. The Basic Accounting Equation
Assets
Are economic resources with probable future benefits owned or controlled by an entity as a result of past transactions and can be measured in national monetary units.
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Assets
Liabilities
Owner’s Equity = +

5. The Basic Accounting Equation
Current Assets:
Assets which are turned into cash or used up within one year or the operating cycle whichever is longer.
Current assets include:
Cash
Short term investment in marketable securities
Accounts receivable (AR)
Notes receivable (NR)
Inventory
Supplies
Prepaid expenses (prepaid rent, prepaid insurance, …..)

6. The Basic Accounting Equation
Long Term Assets (Non Current Assets)
Non Current assets include:
Long term investment in another company
Long term notes receivable
Property, Plant, and Equipment (Fixed Assets)
Assets which are acquired or constructed for the purpose of use in business operations (not for resale to customers) and are expected to provide their benefits for many years.

7. The Basic Accounting Equation
Long Term Assets (Non Current Assets)
Non Current assets include:
-Land (on which a building is constructed) -Delivery equipment
-Building Cars and trucks (vehicles)
-Office equipment Machines
-Furniture
All of the fixed assets mentioned above are subject to depreciation except land.

8. The Basic Accounting Equation
What is depreciation?
Depreciation is the process of allocating the depreciable cost of an asset to expense over its estimated useful life in a rational and systematic manner.
Intangible fixed assets:
Assets which have no physical substance but have probable future benefits. Example:
-Patents
-Copy rights
-Trademarks
-Franchises
-Goodwill

9. The Basic Accounting Equation
Liabilities
Are current obligations of the entity that result from past transactions which will be settled by payment of cash, providing goods, or by providing services.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Assets
Liabilities
Owner’s Equity = +
LO 6 State the accounting equation, and define its components.

10. The Basic Accounting Equation
Liabilities are classified into :
Current Liabilities (Short Term Liabilities)
Are obligations that will be settled by providing cash, goods, or services within the coming year ( one year from the date of the balance sheet)
Current liabilities include:
Accounts payable
Accrued expenses payable (salaries payable, taxes payable,--)
Notes payable
Current maturity of long term debt
Unearned revenue

11. The Basic Accounting Equation
3-2-2 Long Term Liabilities (Noncurrent Liabilities)
Liabilities that will be settled after one year from the date of the balance sheet.
Long Term Liabilities include:
Notes payable
Long term Bank Loans
Bonds Payable

12. The Basic Accounting Equation
Owner’s Equity
Is the financing provided by the owners and business operations.
Ownership claim on total assets.
Referred to as residual equity.
Investment by owners and revenues (+)
Drawings and expenses (-).
Assets
Liabilities
Owner’s Equity = +

13. The Basic Accounting Equation
Stockholders’ equity include:
Contributed capital (Common Stock, Capital Stock)
Other Contributed Capital (Additional-Paid-in-Capital)
Retained Earnings
Sometimes the term net assets is used to refer to total stockholders’ equity since total stockholders’ equity is measured as the difference between total assets and total liabilities.
On the balance sheet, most companies list assets in order of liquidity, liabilities in order of maturity, and shareholders’ equity according to the order shown above.

14. Owner’s Equity Increases in Owner’s Equity
Illustration 1-6
Increases in Owner’s Equity
Investments by owner are the assets the owner puts into the business.
Revenues result from business activities entered into for the purpose of earning income.
Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
LO 6 State the accounting equation, and define its components.

15. Owner’s Equity Decreases in Owner’s Equity
Illustration 1-6
Decreases in Owner’s Equity
Drawings An owner may withdraw cash or other assets for personal use.
Expenses are the cost of assets consumed or services used in the process of earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
LO 6 State the accounting equation, and define its components.

16. Using the Accounting Equation
Transactions are a business’s economic events recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.
LO 7 Analyze the effects of business transactions on the accounting equation.

17. Discuss guided trip options with customer
Using the Accounting Equation
Illustration: Are the following events recorded in the accounting records?
Discuss guided trip options with customer
Purchase computer
Event
Pay rent
Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
Criterion
Record/ Don’t Record
LO 7 Analyze the effects of business transactions on the accounting equation.

18. Transaction Analysis
Transaction (1): Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2014, Ray Neal invests $15,000 cash in the business.
LO 7

19. Transaction Analysis
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
LO 7

20. Transaction Analysis
Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account.
LO 7

21. Transaction Analysis
Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.
LO 7

22. Transaction Analysis
Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
LO 7

23. Transaction Analysis
Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
LO 7

24. Transaction Analysis
Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
LO 7

25. Transaction Analysis
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
LO 7

26. Transaction Analysis
Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
LO 7

27. Transaction Analysis
Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use.
Illustration 1-8
Tabular summary of
Softbyte transactions
LO 7

28. Review Questions . Quiz True or False Questions
1-The basic accounting equation states that Assets = Liabilities.
Answer: False
2-Liabilities are economic resources with probable future benefits owned or controlled by an entity as a result of past transactions and can be measured in national monetary units.
3- Owner’s Equity is the financing provided by the owners and business operations.
Answer: True

29. Review Questions 12. Quiz Multiple Choice Questions
1- Which of the following events cannot be quantified and recorded as an accounting transaction?
The appointment of a new Auditor firm to perform an audit.
The purchase of a new computer.
The sale of store equipment.
Payment of income taxes.
Answer: ____

30. Multiple Choice Questions
Review Questions
Multiple Choice Questions
2- Liabilities _______________
are future economic benefits.
are existing debts and obligations.
possess service potential.
are things of value used by the business in its operation.
Answer: ____

31. 12. Quiz Review Questions Brief explain Questions
1- Briefly explain the current and Non current Assets ?
2- Briefly explain the Intangible fixed assets ?
3- Briefly explain the Current Liabilities (Short Term Liabilities) ?
Brief explain Questions