Chapter One Asset Liability Owners Equity Revenue and

Chapter One Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts

Performance Objectives 1. Define and identify asset, liability, and owner’s equity accounts 2. Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity 2

Performance Objectives 3. Define and identify revenue and expense accounts 4. Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation 3

Fundamental Accounting Equation • A = L + OE • Assets = Liabilities + Owner’s Equity Items owned Amounts owed to creditors Owner’s investment 4

Performance Objective 1 Define and identify asset, liability, and owner’s equity accounts Accounting Is Fun! 5

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! 6

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! 7

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! 8

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

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! 10

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! 11

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

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! 13

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! 14

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. Assets = Liabilities + Owner’s Equity $26, 000 = $0 + $26, 000 Accounting Is Fun! 15

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. Assets = Liabilities + Owner’s Equity $23, 000 = $12, 000 + $11, 000 Accounting Is Fun! 16

Determine Owner’s Equity Ms. Burns has $9, 000 invested in her travel agency, and the agency owes creditors $2, 000. Assets = Liabilities + Owner’s Equity ? = $2, 000 + $9, 000 $2, 000 Liabilities + 9, 000 Owner’s Equity = 11, 000 Assets = Liabilities + Owner’s Equity $11, 000 = $2, 000 + $9, 000 Accounting Is Fun! 17

Determine Owner’s Equity Mr. Shea owns an auto lube shop. His business has assets of $36, 000 and it owes creditors $5, 000. Assets = Liabilities + Owner’s Equity $36, 000 = $5, 000 + ? $36, 000 Assets - 5, 000 Liabilities = 31, 000 Owner’s Equity Assets = Liabilities + Owner’s Equity $36, 000 = $5, 000 + $31, 000 Accounting Is Fun! 18

Determine Owner’s Equity Mr. Stan’s insurance agency has assets of $32, 000; his investment (his equity) amounts to $20, 000. Assets = Liabilities + Owner’s Equity $32, 000 = ? + $20, 000 $32, 000 Assets - 20, 000 Owner’s Equity = 12, 000 Liabilities Assets = Liabilities + Owner’s Equity $32, 000 = $12, 000 + $20, 000 Accounting Is Fun! 19

Performance Objective 2 Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity Accounting Is Fun! 20

Recording Business Transactions We will be recording business transactions for a company with the following details: Owner’s name: L. P. Arch Business name: Arch Copy Co. Business type: Sole Proprietorship (one-person business) Accounting Is Fun! 21

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! 22

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! 23

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! 24

Steps in Recording a Business Transaction 1. What accounts are involved? • Cash, Parking Revenue, Etc… 2. What are the classifications of the accounts involved? 1. A = L + OE – R + E 3. Are the accounts increased or decreased? 4. Is the equation in balance after the transaction has been recorded? 1. A = L + OE – R + E Remember: each business transaction must affect at least two accounts Accounting Is Fun! 25

Recording Transactions Transaction (a): Arch deposited $70, 000 in a bank account in the name of business. Accounting Is Fun! 26

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

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

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

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! 30

Performance Objective 3 Define and identify revenue and expense accounts Accounting Is Fun! 31

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! 32

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! 33

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! 34

Identify Expense Accounts • • • Wages Expense for labor performed Rent Expense for the use of property Interest Expense for the use of money Advertising 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! 35

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! 36

Define Chart of Accounts The official list of account titles to be used to record the transactions of a business , , Accounting Is Fun! Capital Drawing 37

Performance Objective 4 Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation Accounting Is Fun! 38

Recording Transactions Transaction (f): Arch Copy Co. sold services for cash, $2, 520. Accounting Is Fun! 39

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

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! 41

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

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

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

Recording Transactions Transaction (l): Arch Copy Co. paid $1, 800 to Melton Office Supply, its creditor, as part payment on account Accounting Is Fun! 45

Recording Transactions Assets = Cash + Equip. + Ppd. Ins. + Accts. Rec. = Prev. Bal. 34, 660 + 46, 200 + 360 + 1, 050 = (m) - 160 Liabilities A/P + Owner's Equity + L. P. Arch, Capital + Revenue - Expenses 4, 000 + 76, 200 + 3, 570 1, 500 + 160 (Utilities Expense) New Bal. 34, 500 + 46, 200 + 360 + 82, 110 1, 050 = = 4, 000 + 76, 200 + 3, 570 - 1, 660 82, 110 Transaction (m): Arch Copy Co. received and paid a bill from Regional Power, Inc. , for $160. Accounting Is Fun! 46

Recording Transactions Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising. Accounting Is Fun! 47

Recording Transactions Transaction (o): Arch Copy Co. pays wages for a parttime employee, $2, 130. Accounting Is Fun! 48

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! 49

Recording Transactions Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer. Accounting Is Fun! 50

Recording Transactions Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4, 220 Accounting Is Fun! 51

Recording Transactions Assets Prev. Bal. (s) New Bal. = Cash + Equip. + Ppd. Ins. + Accts. Rec. = 36, 620 + 49, 720 + 360 + 200 = - 2, 500 34, 120 + 49, 720 + 360 + 84, 400 200 = = Liabilities A/P + Owner's Equity + L. P. Arch, Capital + 6, 700 + 76, 200 + -2, 500 (Drawing) 6, 700 + 73, 700 + 84, 400 Revenue - Expenses 7, 790 3, 790 7, 790 - 3, 790 Transaction (s): Arch withdraws $2, 500 in cash from the business for her personal living costs Accounting Is Fun! 52

Recording Transactions Assets = Liabilities + Cash + Equip. + Ppd. Ins. + Accts. Rec. = 34, 120 + 49, 720 + 360 + 200 = Left Side of Equals Sign Cash Equip. Ppd. Ins. Accts. Rec. $34, 120 49, 720 360 200 $84, 400 = A/P 6, 700 + + Owner's Equity L. P. Arch, Capital 73, 700 + + Revenue 7, 790 - Expenses 3, 790 Right Side of Equals Sign Accts. Pay. L. P. Arch, Capital Revenue Expenses $ 6, 700 73, 700 7, 790 $88, 190 - 3, 790 $84, 400 Accounting Is Fun! 53

A = L + OE • Does this apply in our own everyday lives? • Buy a car? • Buy a house? Accounting Is Fun! 54

What is the essence of each side? A = L + OE Use of Cash Accounting Is Fun! Source of Cash 55

What is the essence of each side? A = L + OE Accounting Is Fun! 56

Demonstration Problem • We will be recording business transactions for a company with the following details: Owner name: Mai Lee Business name: Lee Attorneys Business type: Sole proprietorship (one-person business) Accounting Is Fun! 57

Demonstration Problem + + (a) Deposited $5, 000 in a bank account in the name of the business Accounting Is Fun! 58

Demonstration Problem Assets (a) (b) Bal. = Liabilities + Cash + Supplies + Law Library + Equip. = A/P 5, 000 -700 4, 300 = = Owner's Equity + M. Lee, Capital + Revenue - Expenses 5, 000 +700 (Rent Expense) 5, 000 700 4, 300 (b) Paid rent for the month, $700 (Rent Expense) Accounting Is Fun! 59

Demonstration Problem Assets = Liabilities + Cash + Supplies + Law Library + Equip. = (a) 5, 000 (b) -700 (c) Bal. 4, 300 6, 300 +2, 000 + 2, 000 = = A/P Owner's Equity + M. Lee, Capital + Revenue 5, 000 Expenses 700 (Rent Expense) +2, 000 + 5, 000 6, 300 - 700 (c) Bought office equipment on credit, $2, 000 Accounting Is Fun! 60

Demonstration Problem Assets (a) (b) (c) (d) Bal. Cash + Supplies + 5, 000 -700 Law Library + Equip. = Liabilities + = A/P + M. Lee, Capital + 5, 000 Revenue - Expenses 700 (Rent Expense) 2, 000 +3, 000 7, 300 Owner's Equity + 9, 300 2, 000 = = 2, 000 + +3, 000 (Income from Services) 5, 000 + 3, 000 9, 300 700 (d) Sold services for cash, $3, 000 Accounting Is Fun! 61

Demonstration Problem Assets (a) (b) (c) (d) (e) Bal. = Liabilities + Cash + Supplies + Law Library + Equip. = 5, 000 -700 2, 000 A/P + M. Lee, Capital + Revenue - Expenses 5, 000 700 (Rent Expense) 2, 000 3, 000 7, 300 + 13, 300 +4, 000 + 2, 000 = = Owner's Equity 2, 000 + 3, 000 (Income from Services) +4, 000 9, 000 + 3, 000 13, 300 700 (e) Mai Less invested her personal law library with a fair market value of $4, 000 Accounting Is Fun! 62

Demonstration Problem Assets (a) (b) (c) (d) = Liabilities + Cash + Supplies + Law Library + Equip. = 5, 000 -700 2, 000 A/P + M. Lee, Capital + Revenue - Expenses 5, 000 700 (Rent Expense) 2, 000 3, 000 (e) (f) -1, 000 Bal. 6, 300 4, 000 + 12, 300 4, 000 + 2, 000 = = Owner's Equity 2, 000 + 3, 000 (Income from Services) 4, 000 -1, 000 8, 000 + 3, 000 12, 300 700 (f) Mai Lee withdraws $1, 000 cash for personal use Accounting Is Fun! 63

Demonstration Problem Assets (a) (b) (c) (d) = Liabilities + Cash + Supplies + Law Library + Equip. = 5, 000 -700 2, 000 A/P + M. Lee, Capital + Revenue - Expenses 5, 000 700 (Rent Expense) 2, 000 3, 000 (e) (f) -1, 000 (g) Bal. 6, 300 + 3, 000 (Income from Services) 4, 000 -1, 000 4, 000 +200 + 12, 500 4, 000 + Owner's Equity 2, 000 = = +200 2, 200 + 8, 000 + 12, 500 3, 000 - 700 (g) Purchased supplies on credit for $200 Accounting Is Fun! 64