Principles of Accounting Chapter 1 The Balance Sheet

What is Accounting? The language of business Two purposes of Accounting: –Record day to day financial activities of a business –Summarize and report information in financial statements for analysis and decision making

Terminology Assets are items of value owned by a business Liabilities are debts owed by a business Equity is the net worth of a business Fundamental Accounting Equation: A = L + E or A – L = E Example, if A = $50 000, L = $ –Equity is $30 000

GAAPS Generally Accepted Accounting Principles Standard accounting rules and guidelines Business Entity Principle: –Each business a separate entity and financial data for business be kept separate from owner’s personal financial data Cost Principle: –Assets must be shown at acquisition cost

Balance Sheet Short tem assets listed in terms of liquidity Long term assets listed by length of life Double underline all major totals who what when Formal statement showing the financial position of a business at a certain date Single lines imply addition or subtraction Dollar signs on top of all columns and below any line

Transactions A business transaction is an exchange of things of value Accounts represent those items of value A promise to do something later and then get paid is not a transaction A = L + E must be in balance before and after every transaction Accounting periods vary with size of business and reflect summary of transactions

Transactions AssetsLiabilities + Owner’s Equity CashA/R Off. Supp. Equip. Auto = A/P Loan J. Wee, Capital Buy $200 Office Supplies for Cash $26800 Purchase $1000 of Equipment “on account” $27800

Transactions AssetsLiabilities + Owner’s Equity CashA/R Off. Supp. Equip. Auto = A/P Loan J. Wee, Capital $27800 Owner withdraws $200 cash for personal use $27600 Company makes a $5000 sale, receiving $3000 in cash and owed the remainder $32600 Company pays $1500 to bank to reduce loan $31100