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Chapter 2

Chapter 2. Determine How Transactions Change the Accounting Equation. Accounting Categories. Accounting is organized into Categories The 5 categories we will use this semester are: Assets —what the company owns Liabilities —what the company owes

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Chapter 2

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  1. Chapter 2 Determine How Transactions Change the Accounting Equation

  2. Accounting Categories • Accounting is organized into Categories • The 5 categories we will use this semester are: • Assets—what the company owns • Liabilities—what the company owes • Owner’s Equity —the owner’s financial right to the company • Revenue—money coming in from the operation of the business • Expenses—money paid out from the operation of the business

  3. Accounts • Each category contains accounts which are individual records of a single item. • Categories and accounts used in Chapter 2 & 3: • Assets—Cash, Prepaid Insurance, Supplies • Liabilities—Biggler Company, Accounts Payable • Owner’s Equity —John Smith, Capital (Investment) John Smith, Drawing (Withdrawals) • Revenue—Sales, Fees • Expenses—Advertising Expense, Miscellaneous Expense, Rent Expense, Repair Expense, Utilities Expense

  4. The Accounting Equation • The relationship between Assest, Liabilities, and Owner’s Equity is written as an equation • Serves as the basis for all accounting organization • Is the root of all concepts we will learn TOTAL ASSETS = TOTAL LIABILITIES + TOTAL OWNER’S EQUITY Or more simply put: A=L+OE

  5. Transactions • A business activity that changes the amounts in the accounting equation A=L+OE • Transactions are stated in numbers that have a common value (Concept: Unit of Measurement). • In the United States, business transactions are recorded in dollars $ and cents

  6. How Transactions Change The Accounting Equation ASSETS = Liabilities + Owner’s Equity A change to either a Liability or to Owner’s Equity Increase Capital Decrease Accts. Pay. (Liability) No change A change to one Assets = • Increase Cash • Decrease Cash A change to two Assets = • Increase Supplies • Decrease Cash

  7. Transactions Sample: Received cash from the owner as an investment $10,000 ASSETS = Liabilities + Owner’s Equity + Capital $10,000 + Cash $10,000

  8. Transactions Sample: Paid cash for supplies $200 ASSETS = Liabilities + Owner’s Equity • Cash $200 + Supplies $200

  9. Transactions Sample: Paid cash for insurance $500 ASSETS = Liabilities + Owner’s Equity • Cash $500 + Prepaid Insurance $500

  10. Transactions Sample: Bought supplies on account from Biggler Company $300 ASSETS = Liabilities + Owner’s Equity + Biggler Co. $300 +Supplies $300

  11. Transactions Sample: Paid cash on account to Biggler Co. for amount owed $100 ASSETS = Liabilities + Owner’s Equity - Biggler Co. $100 - Cash $100

  12. Balance Sheet • A financial statement prepared on a specific date used to report details about a company’s Assets, Liabilities, and Owner’s Equity

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