Assets = Liabilities Stock- holders’ Equity + The Financial Obligations or Debts of a Business The Basic Accounting Equation Economic Resources Owned by.

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Presentation transcript:

Assets = Liabilities Stock- holders’ Equity + The Financial Obligations or Debts of a Business The Basic Accounting Equation Economic Resources Owned by a Business Owners’ Claims on the Assets of a Business

ACCOUNTING EQUATION Like balance sheet but in form of equation. RESOURCES = SOURCES OWNS = OWES ASSETS = EQUTIES(LIABILITIES) ASSETS = LIABILITIES + CAPITAL A = L+O

DIFFERENT PROCEDURE FOR ACCOUNTING EQUATION A=L+O L=A-O O=A-L Expenses are always less from owner’s equity Revenue are always add from owner’s equity

Liabilities Equity Assets =+ Expanded Accounting Equation Revenues Expenses Owner Capital Owner Withdrawals __ ++ __ Owner's Equity Liabilities Equity Assets =+

Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity) J. Scott invests $20,000 cash to start the business.

Transaction Analysis J. Scott invests $20,000 cash to start the business.

The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.

Transaction Analysis Purchased supplies paying $1,000 cash.

The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.

Transaction Analysis Purchased equipment for $15,000 cash.

The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.

Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.

Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Borrowed $4,000 from 1st American Bank.

Transaction Analysis Borrowed $4,000 from 1st American Bank.

Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance.

Transaction Analysis Now, let’s look at transactions involving revenue, expenses and withdrawals.

The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Provided consulting services receiving $3,000 cash.

Transaction Analysis Provided consulting services receiving $3,000 cash.

The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Transaction Analysis Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity.

Transaction Analysis Remember that expenses decrease equity. Paid salaries of $800 to employees.

The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity) Transaction Analysis A withdrawal of $500 is made by the owner. Remember that the withdrawal account actually increases. But, total equity decreases because the withdrawal reduces equity.

Transaction Analysis Remember that withdrawals decrease equity. A withdrawal of $500 is made by the owner.

PRACTICE EXERCISE ACCOUNTING EQUATION

Double-Entry System Exercise Assets LiabilitiesLiabilities Stockholders’ Equity = + 1. Invested $32,000 cash and equipment valued at $14,000 in the business. + 32, , ,000

Double-Entry System Exercise Assets LiabilitiesLiabilities Stockholders’ Equity = + 2. Paid office rent of $600 for the month (expense)

Double-Entry System Exercise Assets LiabilitiesLiabilities Stockholders’ Equity = + 3. Received $3,200 advance on a management consulting engagement. + 3,200

Double-Entry System Exercise Assets LiabilitiesLiabilities Stockholders’ Equity = + 4. Received cash of $2,300 for services completed for Shuler Co. + 2, ,300 (revenue)

Double-Entry System Exercise Assets LiabilitiesLiabilities Stockholders’ Equity = + 5. Purchased a computer for $6, , ,100

Double-Entry System Exercise Assets LiabilitiesLiabilities Stockholders’ Equity = + 6. Paid off liabilities of $7, ,000

Assets LiabilitiesLiabilities Stockholders’ Equity = + 7. paid a cash as salary of $10, ,000 Note that the accounting equation equality is maintained after recording each transaction. Double-Entry System Exercise