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Chapter 1: The Accounting Equation

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1 Chapter 1: The Accounting Equation
Last Update: 6/1/15

2 Essential Outcomes Students apply transactions that affect the accounting equation by: Classifying assets, liabilities or owner’s equity & demonstrate their relationships in the accounting equation Analyzing how transactions affect accounts in an accounting equation Identifying accounting concepts & practices related to a service business Determining net change in owner’s equity Connecting key terms in the chapter with application

3 Accounting Careers VP-Finance Plant Controller
Director of SEC Reporting Accounting Research Bereavement Accounting Sports Accounting Prof Athlete Accounting Real Estate Accounting Budget Director Bookkeeping Payroll Clerk Accounts Payable Clerk Accounts Receivable Clerk Cost Clerk Budget Assistant

4 Accounting Terminology
Accounting: planning, recording, analyzing, & interpreting financial information Accounting system: planned process for providing financial information useful to management Accounting records: organized summaries of a business’ financial activities Financial statements: reports that summarize the financial condition & operation of a business Service business: performs an activity for a fee Proprietorship: a business owned by one person

5 Accounting Terminology
Assets: what a business owns Equities: Financial rights to the assets of a business Equity of those to whom money is owed (liabilities owed to creditors) Equity of the owner Liabilities: what a business owes (debts) Owner’s Equity: Amount remaining after the value of all liabilities is subtracted from the value of all assets

6 Accounting Terminology
Accounting equation: Assets=Liabilities + Owner’s Equity Ethics: principles of right & wrong that guide an individual in making decisions Business Ethics: principles of right & wrong that guides business in making financial decisions

7 Accounting Terminology
Transaction: business activity that changes assets, liabilities and/or owner’s equity Account: a record summarizing all the information pertaining to a single item in the accounting equation Account balance: The amount in an account Capital account: the account used to summarize the owner’s equity in a business Accounts Payable: account used whenever a business purchases assets on account Liability account on the right side of accounting equation Increases on the right side

8 THE ACCOUNTING EQUATION
Lesson 1-1 4/17/2017 THE ACCOUNTING EQUATION page 8 Must always be in balance Total of amounts on the left side must always equal the total of the amounts on the right side Before a business starts, its accounting equation would show all zeros.

9 Transaction 1: August 1. Received cash from owner as an investment, $5,000.
Assets Liabilities Owner’s Equity Account Titles Cash Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $0 August 1 +5,000 Investment New Balances $5,000

10 Transaction 2: August 3. Paid cash for supplies, $275.
Assets Liabilities Owner’s Equity Account Titles Cash Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $0 August 1 +5,000 Investment $5,000 August 3 -275 +275 New Balances $4,725 $275

11 Transaction 3: August 4. Paid cash for insurance, $1,200.
Assets Liabilities Owner’s Equity Account Titles Cash Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $5,000 $0 August 3 -275 +275 $4,725 $275 August 4 -1,200 +1,200 New Balances $3,525 $1,200 Prepaid Insurance: asset account for the purchase of insurance for the business.

12 Transaction 4: August 7. Bought supplies on account from Supply Depot, $500.
Assets Liabilities Owner’s Equity Account Titles Cash Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,525 $275 $1,200 $0 $5,000 August 7 +300 New Balances $575 $300

13 Transaction 5: August 11. Paid cash on account to Supply Depot, $300.
Assets Liabilities Owner’s Equity Account Titles Cash Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,525 $275 $1,200 $0 $5,000 August 7 +300 $575 $300 August 11 -300 New Balances $3,225

14 Accounting Terminology
Revenue: an increase in owner’s equity resulting from the operation of a business Sale on Account: a sale for which cash will be received at a later date Expense: a decrease in owner’s equity resulted from the operation of a business Withdrawals: Assets taken out of a business for the owner’s personal use Accounts Receivable: account used whenever a business makes a “sale on account” Asset account & is on the left side of accounting equation Increases on the right side

15 Transaction 6: August 12. Received cash from sales, $295.00
Assets Liabilities Owner’s Equity Account Titles Cash A/R Oakdale School Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,225 $0 $575 $1,200 $5,000 August 12 +295 revenue New Balances $3,520 $5,295

16 Transaction 7: August 12. Sold services on account to Oakdale School, $350.
Assets Liabilities Owner’s Equity Account Titles Cash A/R Oakdale School Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,225 $0 $575 $1,200 $5,000 August 12 +295 revenue $3,520 $5,295 +350 New Balances $350 $5,645

17 Transaction 8: August 12. Paid cash for rent, $300.
Assets Liabilities Owner’s Equity Account Titles Cash A/R Oakdale School Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,520 $0 $575 $1,200 $5,295 August 12 +350 revenue $350 $5,645 -300 expense New Balances $3,220 $5,345

18 Transaction 9: August 12. Paid cash for telephone bill, $40.
Assets Liabilities Owner’s Equity Account Titles Cash A/R Oakdale School Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,520 $350 $575 $1,200 $0 $5,645 August 12 -300 expense $3,220 $5,345 -40 New Balances $3,180 $5,305

19 Transaction 10: August 18. Received cash on account from Oakdale School, $200.
Assets Liabilities Owner’s Equity Account Titles Cash A/R Oakdale School Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,220 $350 $575 $1,200 $0 $5,345 August 12 -40 expense $3,180 $5,305 August 18 +200 -200 New Balances $3,380 $150

20 Transaction 11: August 18. Paid cash to owner for personal use, $125.
Assets Liabilities Owner’s Equity Account Titles Cash A/R Oakdale School Supplies Prepaid Insurance A/P – Supply Depot Kim Park, Capital Explanation Balances $3,380 $150 $575 $1,200 $0 $5,305 August 18 -125 withdrawal New Balances $3,255 $5,180 Drawing account: used whenever the owner withdraws assets from the business.

21 Summary of Changes in O.E.
Dates Changes In O.E. Initial Investment #6, Revenue (cash) #7, Revenue (on account) #8, Expense (rent) #9, Expense (telephone) #11, Withdrawal Net Changes In O.E. $5,000 +295 +350 -300 -40 -125 $180 Other dates are not listed because there is no direct affect on O.E. (Ending Capital Balance) $5,180 – (5, )

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