The Accounting Equation and Double-entry Bookkeeping 会计等式和复式记账法 Chapter 1 The Accounting Equation and Double-entry Bookkeeping 会计等式和复式记账法 2

Introduction to Financial Statements Income Statement Balance Sheet Statement of Cash Flows Three primary financial statements. We will use a sole proprietorship to describe these statements.

Statement of Financial Position: A Starting Point

Assets(资产) Assets are economic resources that are owned by the business and can be measured in monetary term.

Liabilities are debts that a business owes its creditors.

Owner’s Equity(所有者权益) Owner’s equity represents the owner’s claim to the net assets of the business.

Owner’s Equity Net assets Net worth Capital Proprietorship

The Accounting Equation 会计等式 Assets = Liabilities + Owner’s Equity $300,000 = $80,000 + $220,000 3

Exercise in class II. Problems:1(on page 33).

Let’s analyze some transactions for Guangli service!

Accounts Payable(应付账款） Accounts Payable is the debt that the business owes its supplier for the goods or services provided.

Prepaid Insurance（预付保险费） Prepaid Assets are the resources paid for before receiving the actual benefits. e.g. insurance /advertisement fee

Accounts（账户） The basic recording unit of accounting information

Revenue(收入） Revenues are the amounts of assets that a business earns as a result of selling goods or rendering service in form of receiving the credit card receipts or check or receivable. Receivables are the amounts owed to a business by customers.

Expense（费用） Expenses are the amounts of assets that a business uses up in the process of generating revenues which reduce the owner’s equity. e.g. utility fee (electricity and water bill), payroll

Difference between expenses and prepaid assets Expense: the payment is made after the use of assets. Prepaid assets: the payment is made before the use of the assets. Prepaid assets should be transferred into expense when the relevant asset is used up.

Question one Mr. Li paid 2000 yuan for the office rent of the month. Is that a kind of expense ?

Owner’s Equity(所有者权益) Changes in Owner’s Equity Revenue Expense

Double-entry Bookkeeping (复式记账法) An accounting system by which each transaction is recorded in at least two accounts and the accounting equation is still kept in balance. Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Owner’s Equity Accounting Equation Assets = Liabilities + Owner’s Equity

The Use of Accounts Increases are recorded on one side of the T-account, and decreases are recorded on the other side. Title of Account Left or Debit Side Right or Credit Side

Cash(现金) (a) 1000000 (f) 2000 100200 (b) 360000 (c) 200000 (d) 9000 (e) 3600 (g) 200 572800 Footings Bal. 429 200

Let’s use the previous information and see how debits and credits are recorded in the Cash account for Guangli services.

Debit and Credit Rules (借贷记账法) Debits and credits affect accounts as follows: A = L + OE ASSETS Debit for Increase Credit for Decrease LIABILITIES Debit for Decrease Credit for Increase EQUITIES Debit for Decrease Credit for Increase 13

Each account has a normal balance. Normal Balances Each account has a normal balance. Liabilities Equity Assets = +

Debits and Credits for Revenue and Expense Expenses decrease owner’s equity. Revenues increase owner’s equity. EQUITIES Debit for Decrease Credit for Increase EXPENSES Credit for Decrease Debit for Increase REVENUES Debit for Decrease Credit for Increase

Each account has a normal balance. Normal Balances Each account has a normal balance. _ Owner’s Capital + Revenues Expenses

Account Receivable (应收账款） Receivable includes all the money claimed against people, organizations, or other debtors when a business provides the service or sells the merchandise. e.g. Notes Receivable / Accounts Receivable

Drawing Asset withdrawn from an business by its owners for their personal use. e.g. You are the owner of a small business. The mortgage payment on your home is due, but you have little money in your personal checking account. Therefore, you write a check for this payment from your business bank account.

Investments and Withdrawals by the Owner An owner’s withdrawals decrease owner’s equity. An owner’s investments increase owner’s equity. EQUITIES Debit for Decrease Credit for Increase JILL JONES, CAPITAL Debit for Decrease Credit for Increase JILL JONES, DRAWING Debit for Increase Credit for Decrease

Each account has a normal balance. Normal Balances Each account has a normal balance. Revenues Expenses Owner’s Capital Owner’s Withdrawals _ + Continue

Each account has a normal balance. Normal Balances Each account has a normal balance. Revenues Expenses Owner’s Capital Owner’s Withdrawals _ +

Double Entry Accounting - The Equality of Debits and Credits A +E+D= L+C+R = Debit balances Credit balances In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits. 13

Trial Balance 试算平衡表 A list of all the account balances at a given point of time in the following order: assets, liabilities, owner’s equity, revenue and expenses.

Assignments Problems 3, page 33 A4 paper Better to use pencil