1. Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts
Accounting Is Fun!
Chapter One
Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts

2. Performance Objectives
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
Accounting Is Fun!

3. Performance Objectives
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
Accounting Is Fun!

4. Fundamental Accounting Equation
Accounting Is Fun!
Fundamental Accounting Equation
A = L + OE
Assets = Liabilities + Owner’s Equity
Items
owned
Amounts
owed to
creditors
Owner’s
investment
Accounting Is Fun!

5. Performance Objective 1
Define and identify asset, liability, and owner’s equity accounts
Accounting Is Fun!

6. Define Asset
Asset
Cash, properties, and other things of value owned by an economic unit or business entity
Provides (probable) future economic benefits
Accounting Is Fun!

7. Identify Assets Examples of assets: Assets that seem like Expenses
Cash
Trucks
Buildings
Shoes in a shoe store
Kites in a kite store
Accounts Receivable
The amount owed to you or the business
Assets that seem like Expenses
Prepaid Insurance for one year
Accounting Is Fun!

8. Define Accounts Receivable
An account used to record the amounts owed by charge customers
The business has legal claims against charge customers
Look for the words:
“Sold on account”
A/R = Holding Tank for future receipt of cash
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9. Define Liability Liability In one word:
Debts or amounts owed to creditors
(Probable) sacrifice of future economic benefits
In one word:
Debt
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10. 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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11. 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”
“Bought/purchase on credit
A/P = Holding Tank for cash the business will pay out later
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12. Define Owner’s Equity
The owner’s right to or investment in the business
Assets – Liabilities = Owners’ Equity
A – L = OE
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13. 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 owner’s are paid
In this text book we will use the account:
Capital
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14. 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
Accounting Is Fun!

15. 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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16. Fundamental Accounting Equation
Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed 12,000 from the bank.
Assets =
Liabilities +
Owner’s Equity
$23,000
$12,000
$11,000
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17. Determine Owner’s Equity
Ms. Burns has $9,000 invested in her travel agency, and the agency owes creditors $2,000.
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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18. Determine Owner’s Equity
Mr. Shea owns an auto lube shop. His business has assets of $36,000 and it owes creditors $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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19. Determine Owner’s Equity
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
Accounting Is Fun!

20. Performance Objective 2
Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity
Accounting Is Fun!

21. 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)
Accounting Is Fun!

22. 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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23. Some Definitions Accounts Double-entry accounting
The categories under the Assets, Liabilities, and Owner’s Equity headings
Examples:
Cash
Truck
Accounts Payable
Capital
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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24. 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
Account used:
Drawing
Treated as a temporary decrease in owner’s equity
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25. Steps in Recording a Business Transaction
What accounts are involved?
Cash, Parking Revenue, Etc…
What are the classifications of the accounts involved?
A = L + OE – R + E
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
Accounting Is Fun!

26. Recording Transactions
Transaction (a): Arch deposited $70,000 in a bank account in the name of business.
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27. Recording Transactions
Transaction (b): Bought equipment, paying cash, $33,000.
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28. Recording Transactions=
Liabilities +
Owner's Equity
Cash
Equip.
Accounts Payable
L. P. Arch, Capital
Prev. Bal.
37,000
33,000
70,000
(c)
+ 7,000
New Bal.
40,000
7,000
Assets
77,000
Transaction (c): Bought equipment on account from Melton Office Supply, $7,000.
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29. Recording Transactions
Transaction (d): Paid Melton Office Supply, a creditor, $2,000.
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30. Recording Transactions
Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200.
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31. Performance Objective 3
Define and identify revenue and expense accounts
Accounting Is Fun!

32. Define Revenues 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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33. 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
Accounting Is Fun!

34. Define Expenses
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)
Accounting Is Fun!

35. Identify Expense Accounts
Wages Expense for labor performed
Rent Expense for the use of property
Interest Expense for the use of money
Advertising Expense
Expense incurred but not paid:
Example: Received a bill for a newspaper ad you took out last week
Cash will be paid at a later time
Accounting Is Fun!

36. Owner’s Equity
Revenues and expenses are under the umbrella of owner’s equity
Revenue  Add to Capital account
Expenses  Subtract from Capital account
Accounting Is Fun!

37. Define Chart of Accounts
The official list of account titles to be used to record the transactions of a business
, Capital
, Drawing
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38. Performance Objective 4
Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation
Accounting Is Fun!

39. Recording Transactions
Transaction (f): Arch Copy Co. sold services for cash, $2,520.
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40. Recording Transactions-
Transaction (g): Paid rent for the month, $700.
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41. Recording Transactions-
Transaction (h): Arch Copy Co. bought supplies (toner and paper) on credit. These supplies are used immediately; therefore, they are recorded as an expense ($600).
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42. Recording Transactions
Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy.
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43. Recording Transactions
Transaction (j): Arch Copy Co. received a bill for advertising expense.
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44. Recording Transactions
Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services performed.
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45. Recording Transactions
Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account
Accounting Is Fun!

46. Recording Transactions=
Liabilities +
Cash
Equip.
Ppd. Ins.
Accts. Rec.
A/P
L. P. Arch, Capital
Revenue -
Expenses
Prev. Bal.
34,660
46,200
360
1,050
4,000
76,200
3,570
1,500
(m)
- 160
+ 160
(Utilities Expense)
New Bal.
34,500
1,660
82,110
Assets
Owner's Equity
Transaction (m): Arch Copy Co. received and paid a bill from Regional Power, Inc., for $160.
Accounting Is Fun!

47. Recording Transactions
Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising.
Accounting Is Fun!

48. Recording Transactions
Transaction (o): Arch Copy Co. pays wages for a part-time employee, $2,130.
Accounting Is Fun!

49. Recording Transactions
Transaction (p): Arch Copy Co. buys additional equipment from Melton Office Supply for $3,520, paying $620 down, with the remaining $2,900 on account
Accounting Is Fun!

50. Recording Transactions
Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer.
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51. Recording Transactions
Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4,220
Accounting Is Fun!

52. Recording Transactions=
Liabilities +
Cash
Equip.
Ppd. Ins.
Accts. Rec.
A/P
L. P. Arch, Capital
Revenue -
Expenses
Prev. Bal.
36,620
49,720
360
200
6,700
76,200
7,790
3,790
(s)
- 2,500
-2,500
(Drawing)
New Bal.
34,120
73,700
84,400
Assets
Owner's Equity
Transaction (s): Arch withdraws $2,500 in cash from the business for her personal living costs
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53. Recording Transactions=
Liabilities +
$34,120
49,720
73,700
360
7,790
200
$88,190
Assets
Owner's Equity
Left Side of Equals Sign
Right Side of Equals Sign
Cash
Equip.
Ppd. Ins.
Accts. Rec.
Accts. Pay.
L. P. Arch, Capital
Revenue
Expenses
A/P
34,120
6,700 -
3,790
$ 6,700
- 3,790
$84,400
Accounting Is Fun!

54. A = L + OE Does this apply in our own everyday lives? Buy a car?
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A = L + OE
Does this apply in our own everyday lives?
Buy a car?
Buy a house?
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55. What is the essence of each side?
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A = L + OE
Use of Cash
Source of Cash
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56. What is the essence of each side?
Accounting Is Fun!
What is the essence of each side?
A = L + OE
Owners
Stuff used to generate revenues
Creditors
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57. Demonstration Problem
We will be recording business transactions for a company with the following details:
Owner name:
Mai Lee
Business name:
Lee Attorneys
Business type:
Sole proprietorship
(one-person business)
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58. Demonstration Problem+ +
(a) Deposited $5,000 in a bank account in the name of the business
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59. Demonstration Problem
Assets =
Liabilities +
Owner's Equity
Cash +
Supplies +
Law Library +
Equip. =
A/P +
M. Lee, Capital +
Revenue -
Expenses
(a)
5,000
5,000
(b)
-700
+700
(Rent Expense)
Bal.
4,300 =
5,000 -
700
4,300 =
4,300
(b) Paid rent for the month, $700 (Rent Expense)
Accounting Is Fun!

60. Demonstration Problem
Assets =
Liabilities +
Owner's Equity
Cash +
Supplies +
Law Library +
Equip. =
A/P +
M. Lee, Capital +
Revenue -
Expenses
(a)
5,000
5,000
(b)
-700
700
(Rent Expense)
(c)
+2,000
+2,000
Bal.
4,300 +
2,000 =
2,000 +
5,000 -
700
6,300 =
6,300
(c) Bought office equipment on credit, $2,000
Accounting Is Fun!

61. Demonstration Problem
Assets =
Liabilities +
Owner's Equity
Cash +
Supplies +
Law Library +
Equip. =
A/P +
M. Lee, Capital +
Revenue -
Expenses
(a)
5,000
5,000
(b)
-700
700
(Rent Expense)
(c)
2,000
2,000
(d)
+3,000
+3,000
(Income from Services)
Bal.
7,300 +
2,000 =
2,000 +
5,000 +
3,000 -
700
9,300 =
9,300
(d) Sold services for cash, $3,000
Accounting Is Fun!

62. Demonstration Problem
Assets =
Liabilities +
Owner's Equity
Cash +
Supplies +
Law Library +
Equip. =
A/P +
M. Lee, Capital +
Revenue -
Expenses
(a)
5,000
5,000
(b)
-700
700
(Rent Expense)
(c)
2,000
2,000
(d)
3,000
3,000
(Income from Services)
(e)
+4,000
+4,000
Bal.
7,300 +
4,000 +
2,000 =
2,000 +
9,000 +
3,000 -
700
13,300 =
13,300
(e) Mai Less invested her personal law library with a fair market value of $4,000
Accounting Is Fun!

63. Demonstration Problem
Assets =
Liabilities +
Owner's Equity
Cash +
Supplies +
Law Library +
Equip. =
A/P +
M. Lee, Capital +
Revenue -
Expenses
(a)
5,000
5,000
(b)
-700
700
(Rent Expense)
(c)
2,000
2,000
(d)
3,000
3,000
(Income from Services)
(e)
4,000
4,000
(f)
-1,000
-1,000
Bal.
6,300 +
4,000 +
2,000 =
2,000 +
8,000 +
3,000 -
700
12,300 =
12,300
(f) Mai Lee withdraws $1,000 cash for personal use
Accounting Is Fun!

64. Demonstration Problem
Assets =
Liabilities +
Owner's Equity
Cash +
Supplies +
Law Library +
Equip. =
A/P +
M. Lee, Capital +
Revenue -
Expenses
(a)
5,000
5,000
(b)
-700
700
(Rent Expense)
(c)
2,000
2,000
(d)
3,000
3,000
(Income from Services)
(e)
4,000
4,000
(f)
-1,000
-1,000
(g)
+200
+200
Bal.
6,300 +
200 +
4,000 +
2,000 =
2,200 +
8,000 +
3,000 -
700
12,500 =
12,500
(g) Purchased supplies on credit for $200
Accounting Is Fun!