01powerpoint.pptx fundamental of accounting equation

Accounting equation

1. Chapter One Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts

2. Accounting Is Fun! 1 - 2 Performance Objectives Define and identify asset, liability, and owner’s equity accounts Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity

3. Accounting Is Fun! 1 - 3 Performance Objectives Define and identify revenue and expense accounts Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation

4. Accounting Is Fun! 1 - 4 Fundamental Accounting Equation A = L + OE Assets = Liabilities + Owner’s Equity Items owned Amounts owed to creditors Owner’s investment

5. Accounting Is Fun! 1 - 5 Performance Objective 1 Define and identify asset, liability, and owner’s equity accounts

6. Accounting Is Fun! 1 - 6 Define Asset Asset Cash, properties, and other things of value owned by an economic unit or business entity Provides (probable) future economic benefits

7. Accounting Is Fun! 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 Assets that seem like Expenses Prepaid Insurance for one year

8. Accounting Is Fun! 1 - 8 Define Accounts Receivable Accounts Receivable An account used to record the amounts owed by charge customers The business has legal claims against charge customers Look for the words: “Sold on account” A/R = Holding Tank for future receipt of cash

9. Accounting Is Fun! 1 - 9 Define Liability Liability Debts or amounts owed to creditors (Probable) sacrifice of future economic benefits In one word: Debt

10. Accounting Is Fun! 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. Accounting Is Fun! 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” “Bought/purchase on credit A/P = Holding Tank for cash the business will pay out later

12. Accounting Is Fun! 1 - 12 Define Owner’s Equity The owner’s right to or investment in the business Assets – Liabilities = Owners’ Equity A – L = OE

13. Accounting Is Fun! 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 owner’s are paid In this text book we will use the account: Capital

14. Accounting Is Fun! 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. Accounting Is Fun! 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. Accounting Is Fun! 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. Accounting Is Fun! 1 - 17 Determine Owner’s Equity Ms. Burns has $9,000 invested in her travel agency, and the agency owes creditors $2,000. Assets = Liabilities + Owner’s Equity ? = $2,000 + $9,000 Assets = Liabilities + Owner’s Equity $11,000 = $2,000 + $9,000 $2,000 Liabilities + 9,000 Owner’s Equity = 11,000 Assets

18. Accounting Is Fun! 1 - 18 Determine Owner’s Equity Mr. Shea owns an auto lube shop. His business has assets of $36,000 and it owes creditors $5,000. Assets = Liabilities + Owner’s Equity $36,000 = $5,000 + ? Assets = Liabilities + Owner’s Equity $36,000 = $5,000 + $31,000 $36,000 Assets - 5,000 Liabilities = 31,000 Owner’s Equity

19. Accounting Is Fun! 1 - 19 Determine Owner’s Equity 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 $32,000 Assets - 20,000 Owner’s Equity = 12,000 Liabilities

20. Accounting Is Fun! 1 - 20 Performance Objective 2 Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity

21. Accounting Is Fun! 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. Accounting Is Fun! 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. Accounting Is Fun! 1 - 23 Some Definitions Accounts The categories under the Assets, Liabilities, and Owner’s Equity headings Examples: Cash Truck Accounts Payable Capital 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. Accounting Is Fun! 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 Account used: Drawing Treated as a temporary decrease in owner’s equity

25. Accounting Is Fun! 1 - 25 Steps in Recording a Business Transaction What accounts are involved? Cash, Parking Revenue, Etc… What are the classifications of the accounts involved? A = L + OE – R + E Are the accounts increased or decreased? Is the equation in balance after the transaction has been recorded? A = L + OE – R + E Remember: each business transaction must affect at least two accounts

26. Accounting Is Fun! 1 - 26 Transaction (a): Arch deposited $70,000 in a bank account in the name of business . Recording Transactions

27. Accounting Is Fun! 1 - 27 Recording Transactions Transaction (b): Bought equipment, paying cash, $33,000.

28. Accounting Is Fun! 1 - 28 Recording Transactions Transaction (c): Bought equipment on account from Melton Office Supply, $7,000. = Liabilities + Owner's Equity Cash + Equip. = Accounts Payable + L. P. Arch, Capital Prev. Bal. 37,000 + 33,000 = + 70,000 (c) + 7,000 + 7,000 New Bal. 37,000 + 40,000 = 7,000 + 70,000 = Assets 77,000 77,000

29. Accounting Is Fun! 1 - 29 Transaction (d): Paid Melton Office Supply, a creditor, $2,000. Recording Transactions

30. Accounting Is Fun! 1 - 30 Recording Transactions Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200.

31. Accounting Is Fun! 1 - 31 Performance Objective 3 Define and identify revenue and expense accounts

32. Accounting Is Fun! 1 - 32 Define Revenues 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. Accounting Is Fun! 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. Accounting Is Fun! 1 - 34 Define Expenses 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. Accounting Is Fun! 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 Expense incurred but not paid: Example: Received a bill for a newspaper ad you took out last week Cash will be paid at a later time

36. Accounting Is Fun! 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. Accounting Is Fun! 1 - 37 Define Chart of Accounts The official list of account titles to be used to record the transactions of a business , Capital , Drawing

38. Accounting Is Fun! 1 - 38 Performance Objective 4 Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation

39. Accounting Is Fun! 1 - 39 Transaction (f): Arch Copy Co. sold services for cash, $2,520. Recording Transactions

40. Accounting Is Fun! 1 - 40 Transaction (g): Paid rent for the month, $700. Recording Transactions -

41. Accounting Is Fun! 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 ($600). Recording Transactions - -

42. Accounting Is Fun! 1 - 42 Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy. Recording Transactions

43. Accounting Is Fun! 1 - 43 Transaction (j): Arch Copy Co. received a bill for advertising expense. Recording Transactions

44. Accounting Is Fun! 1 - 44 Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services performed. Recording Transactions

45. Accounting Is Fun! 1 - 45 Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account Recording Transactions

46. Accounting Is Fun! 1 - 46 Transaction (m): Arch Copy Co. received and paid a bill from Regional Power, Inc., for $160. Recording Transactions = Liabilities + Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - Expenses Prev. Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500 (m) - 160 + 160 (Utilities Expense) New Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660 = 82,110 82,110 Assets Owner's Equity

47. Accounting Is Fun! 1 - 47 Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising. Recording Transactions

48. Accounting Is Fun! 1 - 48 Transaction (o): Arch Copy Co. pays wages for a part-time employee, $2,130. Recording Transactions

49. Accounting Is Fun! 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

50. Accounting Is Fun! 1 - 50 Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer. Recording Transactions

51. Accounting Is Fun! 1 - 51 Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4,220 Recording Transactions

52. Accounting Is Fun! 1 - 52 Transaction (s): Arch withdraws $2,500 in cash from the business for her personal living costs = Liabilities + Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - Expenses Prev. Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790 (s) - 2,500 -2,500 (Drawing) New Bal. 34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 - 3,790 = 84,400 84,400 Assets Owner's Equity Recording Transactions

53. Accounting Is Fun! 1 - 53 Recording Transactions = Liabilities + = $34,120 49,720 73,700 360 7,790 200 $88,190 Assets Owner's Equity Left Side of Equals Sign Right Side of Equals Sign Cash Equip. Ppd. Ins. Accts. Rec. Accts. Pay. L. P. Arch, Capital Revenue Expenses Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + 34,120 + 49,720 + 360 + 200 = 6,700 + L. P. Arch, Capital 73,700 + Revenue + 7,790 - - Expenses 3,790 $ 6,700 - 3,790 $84,400 $84,400

54. Accounting Is Fun! 1 - 54 A = L + OE Does this apply in our own everyday lives? Buy a car? Buy a house?

55. Accounting Is Fun! 1 - 55 What is the essence of each side? A = L + OE Use of Cash Source of Cash

56. Accounting Is Fun! 1 - 56 What is the essence of each side? A = L + OE Owners Creditors Stuff used to generate revenues

57. Accounting Is Fun! 1 - 57 Demonstration Problem We will be recording business transactions for a company with the following details: Owner name: Mai Lee Business name: Lee Attorneys Business type: Sole proprietorship (one-person business)

58. Accounting Is Fun! 1 - 58 Demonstration Problem (a) Deposited $5,000 in a bank account in the name of the business + +

59. Accounting Is Fun! 1 - 59 Demonstration Problem = Liabilities + Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses (a) 5,000 5,000 (b) -700 +700 (Rent Expense) Bal. 4,300 = 5,000 - 700 = Assets Owner's Equity 4,300 4,300 (b) Paid rent for the month, $700 (Rent Expense)

60. Accounting Is Fun! 1 - 60 Demonstration Problem = Liabilities + Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses (a) 5,000 5,000 (b) -700 700 (Rent Expense) (c) +2,000 +2,000 Bal. 4,300 + 2,000 = 2,000 + 5,000 - 700 = Assets Owner's Equity 6,300 6,300 (c) Bought office equipment on credit, $2,000

61. Accounting Is Fun! 1 - 61 Demonstration Problem (d) Sold services for cash, $3,000 = Liabilities + Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses (a) 5,000 5,000 (b) -700 700 (Rent Expense) (c) 2,000 2,000 (d) +3,000 +3,000 (Income from Services) Bal. 7,300 + 2,000 = 2,000 + 5,000 + 3,000 - 700 = Assets Owner's Equity 9,300 9,300

62. Accounting Is Fun! 1 - 62 Demonstration Problem = Liabilities + Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses (a) 5,000 5,000 (b) -700 700 (Rent Expense) (c) 2,000 2,000 (d) 3,000 3,000 (Income from Services) (e) +4,000 +4,000 Bal. 7,300 + 4,000 + 2,000 = 2,000 + 9,000 + 3,000 - 700 = Assets Owner's Equity 13,300 13,300 (e) Mai Less invested her personal law library with a fair market value of $4,000

63. Accounting Is Fun! 1 - 63 Demonstration Problem = Liabilities + Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses (a) 5,000 5,000 (b) -700 700 (Rent Expense) (c) 2,000 2,000 (d) 3,000 3,000 (Income from Services) (e) 4,000 4,000 (f) -1,000 -1,000 Bal. 6,300 + 4,000 + 2,000 = 2,000 + 8,000 + 3,000 - 700 = Assets Owner's Equity 12,300 12,300 (f) Mai Lee withdraws $1,000 cash for personal use

64. Accounting Is Fun! 1 - 64 Demonstration Problem = Liabilities + Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses (a) 5,000 5,000 (b) -700 700 (Rent Expense) (c) 2,000 2,000 (d) 3,000 3,000 (Income from Services) (e) 4,000 4,000 (f) -1,000 -1,000 (g) +200 +200 Bal. 6,300 + 200 + 4,000 + 2,000 = 2,200 + 8,000 + 3,000 - 700 = Assets Owner's Equity 12,500 12,500 (g) Purchased supplies on credit for $200