2. Learning Targets
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
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
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3. Fundamental Accounting Equation
A = L + OE
Assets = Liabilities + Owner’s Equity
Items
owned
Amounts
owed to
creditors
Owner’s
investment
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4. Define Asset
Asset
Cash, properties, and other things of value owned by an economic unit or business entity
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5. 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
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6. Define Accounts Receivable
An account used or record of the amounts owed by charge customers (legal claims against charge customers)
Look for the words:
“Sold on account”
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7. Define Liability Liability In one word:
Debts or amounts owed to creditors
In one word:
Debt
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8. 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
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9. Define 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”
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10. Define Owner’s Equity
The owner’s right to or investment in the business
A – L = OE
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11. 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 owners are paid
The Capital account
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12. 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
This slide is changed
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13. 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
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14. Determine Assets
Mr. Stan’s insurance agency has liabilities of $2,000; his investment (his equity) amounts to $9,000.
Assets =
Liabilities +
Owner’s Equity ?
$2,000
$9,000
$2,000
Liabilities +
9,000
Owner’s Equity =
11,000
Assets
Assets =
Liabilities +
Owner’s Equity
$11,000
$2,000
$9,000
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15. Determine Owner’s Equity
Mr. Stan’s insurance agency has assets of $36,000; his liabilities amount to $5,000.
Assets =
Liabilities +
Owner’s Equity
$36,000
$5,000 ?
$36,000
Assets -
5,000
Liabilities =
31,000
Owner’s Equity
Assets =
Liabilities +
Owner’s Equity
$36,000
$5,000
$31,000
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16. Determine Liabilities
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
$32,000
Assets -
20,000
Owner’s Equity =
12,000
Liabilities
Assets =
Liabilities +
Owner’s Equity
$32,000
$12,000
$20,000
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17. 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)
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18. Some Definitions Sole proprietorship Separate entity concept
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
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19. Some Definitions Accounts Double-entry accounting
The categories under the Assets, Liabilities, and Owner’s Equity headings
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
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20. Some Definitions Fair market value Withdrawal
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 (also referred to as drawing)
Treated as a temporary decrease in owner’s equity
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21. Steps in Recording a Business Transaction
What accounts are involved?
What are the classifications of the accounts involved?
Are the accounts increased or decreased?
Is the equation in balance after the transaction has been recorded?
Remember: each business transaction must affect at least two accounts
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22. Recording Transactions (page 10)
Transaction (a): Arch deposited $70,000 in a bank account in the name of business.
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23. Recording Transactions (page 11)
Transaction (b): Bought equipment, paying cash, $33,000.
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24. Define Revenues (page 13)
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)
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25. 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
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26. Define Expenses (page 14)
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)
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27. Identify Expense Accounts
Wages Expense for labor performed
Rent Expense for the use of property
Interest Expense for the use of money
Advertising Expense
Expenses may be paid in cash when incurred (immediately) or at a later time
Expense incurred but not paid until later
Example: Received a bill for a newspaper ad you took out last week
Cash will be paid at a later time – involves Accounts Payable
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28. Owner’s Equity
Revenues and expenses are under the umbrella of owner’s equity
Revenue  Add to Capital account
Expenses  Subtract from Capital account
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29. Define Chart of Accounts
The official list of account titles to be used to record the transactions of a business
, Drawing
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