1. Chapter One Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts Edited by Nancy Goehring

2. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 2 Performance Objectives 1.Define and identify asset, liability, and owner’s equity accounts 2.Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity

3. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 3 Performance Objectives 3.Define and identify revenue and expense accounts 4.Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation

4. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 4 Fundamental Accounting Equation A = L + OE Assets = Liabilities + Owner’s Equity Items owned Amounts owed to creditors Owner’s investment

5. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 5 Performance Objective 1 Define and identify asset, liability, and owner’s equity

6. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 6 Define Asset Asset –Cash, properties, and other things of value owned by an economic unit or business entity

7. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 7 Identify Assets Examples of assets: –Cash –Trucks –Buildings –Shoes in a shoe store –Kites in a kite store –Accounts Receivable The amount owed to you or the business

8. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 8 Define Accounts Receivable Accounts Receivable –An account used or record of the amounts owed by charge customers (legal claims against charge customers) Look for the words: –“Sold on account”

9. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 9 Define Liability Liability –Debts or amounts owed to creditors In one word: –Debt

10. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 10 Identify Liabilities Examples of Debts/Liabilities –Loans (borrowing money) –Accounts Payable account Buy goods/services on credit Receive a bill, but don’t pay until later Buy supplies from a store, but pay for them later

11. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 11 Define Accounts Payable Accounts Payable –A liability account used for short-term liabilities or charge accounts, usually due within thirty days Look for the words: –“Bought/purchased on account”

12. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 12 Define Owner’s Equity The owner’s right to or investment in the business A – L = OE

13. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 13 Identify Owner’s Equity What is left over for the owner after all the debts have been paid –Remember: Creditors must be paid before the owners are paid The Capital account

14. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 14 Fundamental Accounting Equation A = L + OE Assets = Liabilities + Owner’s Equity –The equals sign means that one side must always equal the other side –We’ll use this equation later to determine whether we have recorded our business transactions correctly

15. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 15 Fundamental Accounting Equation Suppose the total value of the assets is $26,000 and the business entity does not owe any amount against the assets. Assets=Liabilities+Owner’s Equity $26,000=$0+$26,000

16. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 16 Fundamental Accounting Equation Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed $12,000 from the bank. Assets=Liabilities+Owner’s Equity $23,000=$12,000+$11,000

17. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 17 Determine Assets Mr. Stan’s insurance agency has liabilities of $2,000; his investment (his equity) amounts to $9,000. Assets=Liabilities+Owner’s Equity ?=$2,000+$9,000 Assets=Liabilities+Owner’s Equity $11,000=$2,000+$9,000 $2,000Liabilities +9,000Owner’s Equity =11,000Assets

18. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 18 Determine Owner’s Equity Mr. Stan’s insurance agency has assets of $36,000; his liabilities amount to $5,000. Assets=Liabilities+Owner’s Equity $36,000=$5,000+? Assets=Liabilities+Owner’s Equity $36,000=$5,000+$31,000 $36,000Assets -5,000Liabilities =31,000Owner’s Equity

19. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 19 Determine Liabilities Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $20,000. Assets=Liabilities+Owner’s Equity $32,000=?+$20,000 Assets=Liabilities+Owner’s Equity $32,000=$12,000+$20,000 $32,000Assets -20,000Owner’s Equity =12,000Liabilities

20. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 20 Performance Objective 2 Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity

21. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 21 Recording Business Transactions We will be recording business transactions for a company with the following details: Owner’s name:L.P. Arch Business name:Arch Copy Co. Business type:Sole Proprietorship (one-person business)

22. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 22 Some Definitions Sole proprietorship –A one-owner business Separate entity concept –The concept by which a business is treated as a separate economic or accounting entity –The business stands by itself, separate from its owners, creditors, and customers

23. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 23 Some Definitions Accounts –The categories under the Assets, Liabilities, and Owner’s Equity headings Double-entry accounting –The system by which each business transaction is recorded in at least two accounts and the accounting equation is kept in balance

24. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 24 Some Definitions Fair market value –The present worth of an asset or the amount that would be received if the asset were sold to an outsider on the open market Withdrawal –The taking of cash or other assets out of a business by the owner for his or her own use (also referred to as drawing) –Treated as a temporary decrease in owner’s equity

25. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 25 Steps in Recording a Business Transaction 1.What accounts are involved? 2.What are the classifications of the accounts involved? 3.Are the accounts increased or decreased? 4.Is the equation in balance after the transaction has been recorded? Remember: each business transaction must affect at least two accounts

26. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 26 Transaction (a): Arch deposited $70,000 in a bank account in the name of business. Recording Transactions (page 10)

27. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 27 Recording Transactions (page 11) Transaction (b): Bought equipment, paying cash, $33,000.

28. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 28 Recording Transactions (page 11) Transaction (c): Bought equipment on account from Melton Office Supply, $7,000.

29. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 29 Transaction (d): Paid Melton Office Supply, a creditor, $2,000. Recording Transactions (page 12)

30. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 30 Recording Transactions (page 12) Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200. +

31. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 31 Performance Objective 3 Define and identify revenue and expense accounts

32. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 32 Define Revenues (page 13) The amounts a business earns Examples –Fees earned for performing services –Sales of merchandise –Rent income, and interest income May take the form of cash, credit card receipts, or accounts receivable (charge accounts)

33. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 33 Identify Revenue Accounts Fees Earned for performing services Sales Income from selling merchandise Rent Income for the use of property Interest Income for lending money Credit Sales where cash will be received at a later time –Example: Home Depot sells lumber to a customer and lets the customer pay later

34. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 34 Define Expenses (page 14) The costs that relate to earning revenue (the costs of doing business) Examples –Wages –Rent –Interest –Advertising May be paid in cash, immediately or at a future time (accounts payable)

35. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 35 Identify Expense Accounts Wages Expense for labor performed Rent Expense for the use of property Interest Expense for the use of money Advertising Expense Expenses may be paid in cash when incurred (immediately) or at a later time Expense incurred but not paid until later –Example: Received a bill for a newspaper ad you took out last week –Cash will be paid at a later time – involves Accounts Payable

36. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 36 Owner’s Equity Revenues and expenses are under the umbrella of owner’s equity Revenue  Add to Capital account Expenses  Subtract from Capital account

37. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 37 Define Chart of Accounts The official list of account titles to be used to record the transactions of a business, Drawing

38. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 38 Performance Objective 4 Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation

39. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 39 Transaction (f): Arch Copy Co. sold services for cash, $2,520. Recording Transactions (page 15)

40. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 40 Transaction (g): Paid rent for the month, $700. Recording Transactions (page 15) +

41. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 41 Transaction (h): Arch Copy Co. bought supplies (toner and paper) on credit. These supplies are used immediately; therefore, they are recorded as an expense. (New IRS regulations as of 2005.) Recording Transactions (page 16)

42. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 42 Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy. (If the insurance is paid in advance for a period longer than one month, it has value and is therefore recorded as an asset.) Recording Transactions (page 16)

43. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 43 Transaction (j): Arch Copy Co. received a bill for an expense. Recording Transactions (page 17)

44. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 44 Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services performed. Recording Transactions (page 17)

45. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 45 Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account Recording Transactions (page 18)

46. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 46 Transaction (m): Arch Copy Co. received and paid a bill from Regional Power Inc. for $160. Recording Transactions (page 18)

47. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 47 Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising. Recording Transactions (page 19)

48. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 48 Transaction (o): Arch Copy Co. pays wages for a part- time employee, $2,130. Recording Transactions (page 19)

49. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 49 Transaction (p): Arch Copy Co. buys additional equipment from Melton Office Supply for $3,520, paying $620 down, with the remaining $2,900 on account Recording Transactions (page 19)

50. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 50 Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer. Recording Transactions (page 19)

51. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 51 Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4,220 Recording Transactions (page 20)

52. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 52 Transaction (s): Arch withdraws $2,500 in cash from the business for her personal living costs Recording Transactions (page 20)

53. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 53 Recording Transactions Expenses 3790 _______

54. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 54 Demonstration Problem We will be recording business transactions for a company with the following details: Owner name:James Kirk Business name:James Kirk, CPA Business type:Sole proprietorship (one-person business)

55. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 55 Demonstration Problem

56. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 56 Demonstration Problem (a)Deposited $13,500 in a bank account in the name of the business

57. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 57 Demonstration Problem (b) Paid rent for the month, $1,600 (Rent Expense)

58. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 58 Demonstration Problem (c) Bought equipment, including a computer and a printer, for $9,500 from Bingham Company. Paid $6,700 in cash, with the balance due in thirty days.

59. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 59 Demonstration Problem (d) Purchased office supplies and announcements for $970 from City Stationers. Payment is due in 30 days.

60. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 60 Demonstration Problem (e) Billed clients $5,500 for services rendered (Client Fees).

61. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 61 Demonstration Problem (f) Paid $1,450 salary to secretary/assistant for the month.

62. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 62 Demonstration Problem (g) Paid telephone bill of $210 (Telephone Expense).

63. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 63 Demonstration Problem (h) Received cash from clients previously billed on account, $2,450.

64. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 64 Demonstration Problem (i) Paid Bingham Company $970 on account.

65. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 65 Demonstration Problem (j) Paid $275 for continuing education course (Miscellaneous Expense)

66. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 66 Demonstration Problem (k) Kirk withdrew $2,200 for personal use.

67. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 67 Demonstrate that the total of one side of the equation equals the total of the other side of the equation.

68. Copyright © Houghton Mifflin Company. All rights reserved. 1 - 68 In-class and Homework Assignments