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Chapter One

Chapter One

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Chapter One

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  1. 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 • 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: • 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 • 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 Accounting Is Fun!

  9. Define Liability • Liability • Debts or amounts owed to creditors • (Probable) sacrifice of future economic benefits • In one word: • Debt Accounting Is Fun!

  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 Accounting Is Fun!

  11. Define Accounts Payable • 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 Accounting Is Fun!

  12. Define Owner’s Equity • The owner’s right to or investment in the business • Assets – Liabilities = Owners’ Equity • A – L = OE Accounting Is Fun!

  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 Accounting Is Fun!

  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. Accounting Is Fun!

  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. Accounting Is Fun!

  17. Determine Owner’s Equity Ms. Burns has $9,000 invested in her travel agency, and the agency owes creditors $2,000. Accounting Is Fun!

  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. Accounting Is Fun!

  19. Determine Owner’s Equity Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $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: Accounting Is Fun!

  22. Some Definitions • Sole proprietorship • 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 Accounting Is Fun!

  23. Some Definitions • Accounts • 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 Accounting Is Fun!

  24. Some Definitions • Fair market value • 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 Accounting Is Fun!

  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? • A = L + OE – R + E 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. Accounting Is Fun!

  27. Recording Transactions Transaction (b): Bought equipment, paying cash, $33,000. Accounting Is Fun!

  28. Recording Transactions Transaction (c): Bought equipment on account from Melton Office Supply, $7,000. Assets = Liabilities + Owner's Equity Cash + Equip. = Accounts Payable + L. P. Arch, Capital Prev. Bal. 37,000 + 33,000 = + 70,000 (c) + 7,000 + 7,000 New Bal. 37,000 + 40,000 = 7,000 + 70,000 = 77,000 77,000 Accounting Is Fun!

  29. Recording Transactions Transaction (d): Paid Melton Office Supply, a creditor, $2,000. Accounting Is Fun!

  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. Accounting Is Fun!

  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) Accounting Is Fun!

  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 , Capital , Drawing The official list of account titles to be used to record the transactions of a business Accounting Is Fun!

  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. Accounting Is Fun!

  40. Recording Transactions - Transaction (g): Paid rent for the month, $700. Accounting Is Fun!

  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). Accounting Is Fun!

  42. Recording Transactions Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy. Accounting Is Fun!

  43. Recording Transactions Transaction (j): Arch Copy Co. received a bill for advertising expense. Accounting Is Fun!

  44. Recording Transactions Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services performed. Accounting Is Fun!

  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 Assets = Liabilities + Owner's Equity 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 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660 82,110 = 82,110 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. Accounting Is Fun!