1. Principles of Accounting Chapter 1 The Balance Sheet

2. 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

3. 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 = $20 000 –Equity is $30 000

4. 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

5. 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

6. 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

7. Transactions AssetsLiabilities + Owner’s Equity CashA/R Off. Supp. Equip. Auto = A/P Loan J. Wee, Capital 1000 500 300 10000 15000 2000 5000 19800 Buy $200 Office Supplies for Cash - 200+200 800 500 500 10000 15000 2000 5000 19800 $26800 Purchase $1000 of Equipment “on account” +1000 +1000 800 500 500 11000 15000 3000 5000 19800 $27800

8. Transactions AssetsLiabilities + Owner’s Equity CashA/R Off. Supp. Equip. Auto = A/P Loan J. Wee, Capital 800 500 500 11000 15000 3000 5000 19800 $27800 Owner withdraws $200 cash for personal use -200 600 500 500 11000 15000 3000 5000 19600 $27600 Company makes a $5000 sale, receiving $3000 in cash and owed the remainder +3000 +2000 +5000 3600 2500 500 11000 15000 3000 5000 24600 $32600 Company pays $1500 to bank to reduce loan -1500 2100 2500 500 11000 15000 3000 3500 24600 $31100