The Accounting Equation Simple A L OE Expanded

The Accounting Equation Simple: A = L + OE Expanded: A = L + OE + R - E Net Profit belongs to Owners & therefore increase owners equity 1

Balance Sheet: A Starting Point 2

Assets – • resources controlled by the enterprise • past events • provide future economic benefits 3

Liabilities – • present obligation • past events • future outflows of economic benefits 4

Owner’s Equity Owner’s equity • the residue of Assets over Liabilities • represents the owner’s claim in the business. 5

Owner’s Equity Changes in Owner’s Equity • Owner’s Investments • Owner’s Withdrawals • Business Earnings • Business Losses 6

The Accounting Equation Assets = Liabilities + Owner’s Equity $300, 000 = $80, 000 + $220, 000 7

Let’s analyze some transactions for JJ’s Lawn Care Services. 8

The Effects of Business Transactions On May 1, 2001, Jill Jones deposited $8, 000 in the bank to officially start JJ’s Lawn Care Service. 9

The Effects of Business Transactions 10

The Effects of Business Transactions On May 2, 2001, JJ’s purchased a riding lawn mower for $2, 500 cash. 11

The Effects of Business Transactions 12

The Effects of Business Transactions On May 8, 2001, JJ’s purchased a $15, 000 truck. JJ’s paid $2, 000 down in cash and issued a note payable for the remaining $13, 000. 13

The Effects of Business Transactions 14

The Effects of Business Transactions On May 11, 2001, JJ’s purchased some repair parts for $300 on account. 15

The Effects of Business Transactions 16

The Effects of Business Transactions On May 18, 2001, JJ’s sold half of their repair parts to ABC Lawns for $150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days. 17

The Effects of Business Transactions 18

The Effects of Business Transactions On May 25, 2001, ABC Lawns pays JJ’s $75 as a partial settlement of its accounts receivable. 19

The Effects of Business Transactions 20

The Effects of Business Transactions On May 28, 2001, JJ’s pays $150 of its accounts payable. 21

The Effects of Business Transactions 22

The Effects of Business Transactions On May 29, 2001, JJ’s recorded lawn care services provided during May of $750. All clients paid in cash. 23

The Effects of Business Transactions 24

The Effects of Business Transactions On May 31, 2001, JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. 25

The Effects of Business Transactions 26

The Effects of Business Transactions Let’s review how JJ’s transactions affected the accounting equation. 27

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These transactions impact the Statement of Cash Flows. These transactions impact the Income Statement. 29

Let’s prepare the Income Statement and Statement of Cash Flows for JJ’s Lawn Care Service for the month ending May 31, 2001. 30

Investments and withdrawals by the owner are not included on the Income Statement. 31

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Operating activities include the cash effects of revenue and expense transactions. 33

Investing activities include the cash effects of purchasing and selling assets. 34

Financing activities include the cash effects of transactions with the owner and creditors. 35

Relationships Among Financial Statements Beginning of period Time Balance Sheet End of period Balance Sheet Income Statement of Cash Flows 36