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ACCOUNTING 101

ACCOUNTING 101. CHAPTER ONE: Asset, Liability, Owner’s Equity,Revenue, and Expense Accounts. The Fundamental Accounting Equation. Assets=Liabilities+Owner’s Equity The three major classifications ALOE, the memory tool. ASSETS. Property or things of value owned by an economic unit CASH

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ACCOUNTING 101

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  1. ACCOUNTING 101 CHAPTER ONE: Asset, Liability, Owner’s Equity,Revenue, and Expense Accounts

  2. The Fundamental Accounting Equation • Assets=Liabilities+Owner’s Equity • The three major classifications • ALOE, the memory tool

  3. ASSETS • Property or things of value owned by an economic unit • CASH • SUPPLIES • EQUIPMENT • BUILDING • LAND

  4. OWNER’S EQUITY • Owner’s equity: owner’s claim, investment, net worth, or proprietorship • Owner’s name followed by the word “CAPITAL” • Owner withdrawals of cash or assets for personal use

  5. Partial Equation • ASSETS=OWNER’S EQUITY • Property or things of value owned by the business=Owner’s right to or investment in the business • Assets ($60,000)=OE ($60,000)(p8) • Here, nothing is owed against the assets…no liabilities.

  6. LIABILITIES • Liabilities are debts or amounts owed to the creditors • The business entity may have bought goods or services on credit or borrowed money or created some obligation to pay • Creditors’ claims to business assets have priority over the owner’s claim

  7. The Fundamental Accounting Equation • Assets=Liabilities + Owner’s Equity • ? = $4,000 + $16,000 • $20,000 = $4,000 + $16,000 (p9) • $20,000 = ? + $16,000 • $20,000 = $4,000 + ? • The equation must stay in balance!

  8. Finding the unknown part of the equation • Determine the owner’s equity • Assets = Liabilities + Owner’s Equity • $38,000= $5,000 + ? • Do the math!………………$33,000 (OE) • $38,000 = $5,000 + $33,000 • Balanced!

  9. Finding the unknown part of the equation • Determine the liabilities • Assets = Liabilities + Owner’s Equity • $68,000 = ? + $22,000 (p9) • Do the math! • $68,000 = $46,000 + $22,000 • Balanced!

  10. Recording Business Transactions • Remember? Business transactions are events that effect the operations of the economic unit. • Each business transaction must be recorded under the appropriate three classifications and then the appropriate “account” under these classifications… • Each side of the equation must always balance!

  11. Recording Business Transactions • Owner (Cline) deposits $82,000 in a bank account in name of business (separate entity). (P10) Transaction (a) • Asset(classification)=Liabilities(class-ification) + Owner’s Equity (classification) • Asset/Cash (Account)=Liabilities + Owner’s Equity/Capital (Account) • $82,000Asset/Cash = $82,000/Capital/OE • Balanced with no Liabilities!

  12. Recording Business Transactions • Cline buys equipment paying $64,000 cash out of the $82,000 cash on hand in bank (see p11) • Cash goes down by $64,000 • Cash remaining is $18,000 • Equipment goes up by $64,000 • Left side of equation is still $82,000 and is balanced with right side! • $64,000 from cash account and $64,000 into equipment account is a double-entry notation…

  13. Double-Entry Accounting • Double-entry means that each transaction must be recorded in at least two accounts keeping the equation in balance • Review Transaction (b) on p. 11 • Two entries were made: $64,000 taken out of cash account • $64,000 put into equipment account • Cash and equipment are assets and found on the left side of the equation

  14. Another Business Transaction • What if we buy equipment on account or on credit? See p. 11 Transaction (c ) • Cline buys $10,000 of equipment on account creating a liability • Equipment (Asset) increases by $10,000 on left side of equation • Accounts Payable (Liability) increases by $10,000 on right side of equation • Each side is now totaled at $92,000 and balanced but how and why?

  15. Double-entry Accounting • Review Transaction (c ) again p11 • We increased the Assets by $10,000 by buying more Equipment (an asset). Asset classifications are located on left side of equation and Equipment is an asset account • We increased our Liabilities by $10,000 by buying more equipment on credit. • Therefore, the Accounts Payable account under the Liabilities classification is increased over on the right side of the equation. Ah-Ha! A double-entry!

  16. Double-entry Accounting • Please look at Transaction (d) p12 • Here we pay down the Accounts Payable by $6,000 leaving a balance of $4,000 in this account • We take the $6,000 out of the Cash Account to pay down Accounts Payable leaving $12,000 in cash. • Therefore, Cash is reduced AND Accounts Payable is reduced! • Another double-entry notation and we still balance left side to right side.

  17. Double-entry AccountingAnother Business Transaction • Owner invests equipment into business valued at $6,200-Transaction (e) • This will increase the Equipment Account balance by $6,200 as well as the Capital Account balance by $6,200 • Again, another double-entry notation: one on the left side and one on the right side! • The balance now is $92,200 left and right

  18. Review these Transactions • p13-Summary of Transactions a-e

  19. Chart of Accounts • Official list of accounts tailor-made for the business by the Accountant. Any changes must be approved by Management… • Assets #100’s see p14 • Liabilities #200’s • Owner’s Equity #300 • Revenue (increase in OE) #400’s • Expenses (decrease in OE) #500’s

  20. Revenue and Expense Accounts • These fall under the Owner’s Equity classification • Revenue (Income) increases Owner’s Equity • Expenses (Bills) decrease Owner’s Equity • Revenue is recognized when earned whether in cash or sold on credit • Cash revenue will increase the Cash Account • Services sold on credit will increase Accounts Receivable account

  21. Revenue example • P15 Transaction (f) Company sold services for cash in the amount of $3,520. Revenue Account is increased by $3,520 and the Cash Account is increased by $3,520 (left side and right side double-entry notation) • Each side is balanced

  22. Expense example • P15 Transaction (g) Company paid the rent for the month in amount of $900. • Cash Account is decreased by $900 • Rent Expense Account (under the Expense classification) is increased by $900

  23. Introducing new Asset Accounts • Prepaid Insurance p18 • Accounts Receivable

  24. Summary of Sample Transaction p21 • Let’s take a look at p21 in text • Transactions f-s • What happened at Cline’s Computer? • Some things happened on the left side of the equation: Cash, Equipment, Prepaid Insurance, Accounts Receivable • Some things happened on the right side of the equation: Accounts Payable, Cline/ Capital, Revenue, and then less Expenses • $96,770=$96,770: Balanced

  25. The Demonstration Problem

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