How Business Activities Change the Accounting Equation Ch. 1 Section 2 Notes How Business Activities Change the Accounting Equation

#1 Note card Time! Assets Note card #1 Cash Petty Cash Accounts Receivable Supplies Prepaid Insurance #1

#2 Note card Time! Liabilities Note card #2 Accounts Payable Can go up or down #2

#3 Note card Time Ends! Owner’s Equity (Investment) Note card # 3 Capital + or - Drawing - #3

Vocab Service business - A business that performs an activity for a fee. Proprietorship – a business owned by one person Business plan – a formal written document that describes the nature of a business and how it will operate.

GAAP Generally Accepted Accounting Principles Helps insure that all companies follow the same set of guidelines and practices when reporting financial data.

The Accounting Equation! An equation showing the relationship among assets, liabilities, and owner’s equity. Assets = Liabilities + Owner’s Equity Or Assets-Liabilities = Owner’s Equity THE ACCOUNTING EQUATION MUST BE IN BALANCE TO BE CORRECT! Left side = Right side

Business Activities change the amounts in the accounting equation Transaction- A business activity that changes assets, liabilities, or owner’s equity. Receiving Cash is an example (See Transaction 1 on page 10)

Terms Continued Account Title- The name given to an account. Account Balance- The amount in an account. Capital- The account used to summarize the owner’s equity in a business. Worth.

Received Cash from Owner as an Investment Examples of Transactions Affecting the Accounting Equation and Accounts Affected Example 1: Received Cash from Owner as an Investment Cash (+Left) (Gained cash) Capital (+Right) (Increased capital)

Example Two Paid Cash for Supplies Cash (–Left) (Lost cash) Supplies (+Left) (Gained supplies)

Example 3 Paid Cash for Insurance Cash (–Left) (Lost cash) Prepaid Insurance (+Left) (Gained insurance)

Example 4 Bought Supplies on Account Supplies (+Left) (Gained supplies) Accounts Payable (+Right) (Increased Liability)

Example 5 Paid Cash on Account Cash (–Left) (Lost cash) Accounts Payable (–Right) (Decreased a Liability)

The End! WT and OYO in your account