Chapter 1 Asset Liability Owners Equity Revenue and
Chapter 1 Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts 1 College Accounting 10 th Edition Mc. Quaig Bille Nobles Power. Point presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University 1– 1 © 2011 Cengage Learning
Assets are properties and other things of value owned and controlled by an economic unit or business entity. § Cash § Equipment § Copyright § Building § Land 1– 2
Owner’s Equity § The owner’s right, claim, or financial interest is expressed by the word equity in the business. § Another term that could be used is capital. 1– 3
Liabilities represents debt. The creditors’ claims to the assets have priority over the claims of the owners. 1– 4
Fundamental Accounting Equation An equation expressing the relationship of assets, liabilities, and owner’s equity is called the fundamental accounting equation. Assets = Liabilities + Owner’s Equity The total of one side of the fundamental accounting equation must always equal the total of the other side. 1– 5
Recording Business Transactions J. Conner establishes a sole proprietorship called Conner’s Whitewater Adventure. § Treating the business as independent from its owners, creditors, and customers is called the separate entity concept. 1– 6
Transaction (a). Conner deposited $90, 000 in a bank account in the name of the business. § The account denoted by the owner’s name followed by the word Capital records the amount of the owner’s investment (or equity) in the business. 1– 7
Transaction (b). Conner bought equipment, paying cash, $38, 000. 1– 8
Transaction (c). Company bought equipment on account from Signal Products, $4, 320. 1– 9
Transaction (d). Company paid Signal Products, a creditor, $2, 000 on account. 1– 10
Transaction (e). Owner invested equipment with a fair market (or present) value of $5, 200 in the business. 1– 11
Summary of Transactions 1– 12
Revenue Accounts § Revenues are the amounts earned by a business. • Fees earned for performing services • Income from selling merchandise • Rent income for the use of property • Interest income for lending money Revenues may be in the form of cash or credit card receipts. 1– 13
Expense Accounts § Expenses are the costs that relate to earning revenue (or the costs of doing business). • Wages expense for labor performed • Rent expense for the use of property • Interest expense for the use of money • Advertising expense for the use of various media When If a business earns incurs revenue, or pays an expenses, increase in owner’s equity decreases. occurs. 1– 14
The chart of accounts is the official list of accounts tailor-made for the business. Chart of Accounts Assets (100 s) 111 113 117 124 Cash Accounts Receivable Prepaid Insurance Equipment Owner's Equity (300 s) 311 J. Conner, Capital 312 J. Conner, Drawing Revenues (400 s) 411 Income from Tours Liabilities (200 s) Expenses (500 s) 221 Accounts Payable 511 512 513 514 515 Wages Expense Rent Expense Supplies Expense Advertising Expense Utilities Expense 1– 15
Transaction (f). Company sold whitewater rafting tours for cash, $8, 000. 1– 16
Transaction (g). Company paid rent for the month, $1, 250. 1– 17
Transaction (h). Company bought supplies on credit, $675. 1– 18
Transaction (i). Company paid for insurance, $1, 875. § The company paid for a one-year liability insurance policy. Because it is paid in advance for a period longer than one month, it has value and is recorded as an asset. 1– 19
Steps in Analyzing Transactions 1. Read the transaction to understand what is happening and how it affects the business. 2. Decide on the classifications of the accounts involved. 3. Decide whether the accounts are increased or decreased. 4. After recording the transaction, make sure the accounting equation is in balance. 1– 20
Transaction (j). Company receives a bill for an expense, $620. 1– 21
Transaction (k). Company sold services on account. § Conner’s Whitewater Adventures signs a contract with Crystal River Lodge to provide 27 one-day rafting tours and bills Crystal River Lodge for $6, 750. § The company uses the Accounts Receivable (an asset) account to record amounts due from charge customers. 1– 22
Transaction (l). Company paid creditor on account. 1– 23
Transaction (m). Company paid an expense in cash, $225. 1– 24
Transaction (n). Company paid creditor on account, $620. § Recall that this bill had been previously recorded as a liability in transaction (j). 1– 25
Transaction (o). Company paid an expense in cash. § Conner’s Whitewater Adventures pays wages of a part-time employee, $2, 360. 1– 26
Transaction (p). Company buys equipment on account for $3, 780, making a cash down payment of $1, 850 and charging $1, 930. Note that three accounts are involved in this transaction. 1– 27
Transaction (q). Company receives cash on account from credit customer, $2, 500. § Conner’s Whitewater Adventures receives $2, 500 from Crystal River Lodge to apply against the amount billed in transaction (k). 1– 28
Transaction (r). Company sells services for cash, $8, 570. § Conner’s Whitewater Adventures receives revenue from cash customers during the rest of the month, $8, 570. 1– 29
Transaction (s). Owner makes a cash withdrawal, $3, 500. § Conner withdraws $3, 500 from the business for personal living costs. § A withdrawal may be considered the opposite of an investment in cash by the owner. 1– 30
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