2. Account is to give an explanation of something, to report,
to be responsible.
Accounting is analyzing, recording, reporting, and
interpreting financial information.
◦ Analyzing: what happened? How is organization affected?
◦ Recording: capturing and entering information.
◦ Reporting: summarize and provide information.
◦ Interpreting: how do all the pieces fit together?
Who uses this information?
◦ Internal users: business personnel (managers and owners)
◦ External users: government, general public, investors
3. Sole proprietorship: one owner. Easy to form, owners
makes all decisions, could lose personal assets to
meet business obligations.
Partnership: owned by more than one person. Share
decision making, partners combine skills and
resources, partners could lose personal assets to
meet business obligations.
Corporation: owned by stockholders. Can be difficult
to form. Stockholders not personally liable for debts of
corporation. Board of directors hire management team
to run the business.
4. Service: perform an activity for a fee.
◦ Doctors, lawn care, hotel, airline
Merchandiser: sell products.
◦ Home Depot, Barnes & Noble, JC Penney, Best Buy
Manufacturer: make products.
◦ Ford, General Electric, Nintendo, Motorola
5. Assets: things of value that are OWNED.
◦ Cash, equipment, furniture, supplies, etc.
Equity: rights of financial claim to an asset.
ASSETS = EQUITIES
Every asset has an owner.
6. Owner’s Equity: rights of owner to the assets of
the business. Known as Capital.
Liabilities: business buys assets on account.
Liability is an obligation to pay in the future. So,
some assets the business possesses are actually
OWNED by another entity (creditor) until the
business pays for them.
ASSETS = LIABILITIES + OWNER’S EQUITY
7. ASSETS = LIABILITIES + OWNER’S EQUITY
Assets
◦ Anything of value that is owned.
Ex. Cash to buy supplies for the business.
Liabilities
◦ The amount of assets owed by a business
Ex. “Buy” computer equipment on account.
Buy now, pay later.
Owner’s Equity
◦ Owner’s financial interest in the business assets.
8. ASSETS = LIABILITIES + OWNER’S EQUITY
A business has assets of $150,000 and liabilities
of $50,000. What is owner’s equity?
$150,000 = $50,000 + ?
Owner’s Equity = $100,000
How would the equation look?
◦ $150,000 = $50,000 + $100,000
9. Business activities that change the accounting
equation are called transactions.
After each transaction the accounting equation
must remain in balance.
ASSETS = LIABILITIES + OWNER’S EQUITY
10. Received cash from owner as an investment
$10,000
◦ Cash (asset)
Increases by $10,000
◦ Capital (Owner’s Equity)
Increase by $10,000
$10,000 = $0 + $10,000
Cash is an asset. Business owner has financial
claim to the asset.
ASSETS = LIABILITIES + OWNER’S EQUITY
11. Paid cash for supplies $750
◦ Cash (asset)
Decreased by $750
◦ Supplies (asset)
Increases by $750
Cash: $10,000-$750 = $9,250
Supplies: 0 + $750 = $750
$9,250+ $750 = $0 + $10,000
Exchange one asset for another asset.
Still $10,000 in total assets however the
composition of assets has changed.
ASSETS = LIABILITIES + OWNER’S EQUITY
12. Paid cash for insurance $1,000
Cash (asset)
◦ Decrease by $1,000
Insurance (asset)
◦ Increases by $1,000
Cash: $9,250 - $1000= $8,250
Supplies: = $750
Insurance: $0 + 1,000 = $1,000
Capital (Owner’s Equity) = $10,000
$8,250 + $750 + $1,000 = $0 + $10,000
Insurance is usually prepaid and covers business in the
event of fire, theft, etc.
ASSETS = LIABILITIES + OWNER’S EQUITY
13. Business “buys” supplies on account for $250
Supplies (asset)
◦ Increases $250
Accounts Payable (Liability)
◦ Increases by $250
Cash: $8,250
Supplies: $750 + $250 = $1,000
Insurance: $1,000
Liabilities: 0 + $250 = $250
Capital (Owner’s Equity) = $10,000
$8,250 + $1,000 + $1,000 = $250 + $10,000
Accounts Payable reflects the obligation that business
OWES payment on assets.
ASSETS = LIABILITIES + OWNER’S EQUITY
15. Revenue – generated when business makes a
sale, INCREASES OWNER’s EQUITY
◦ After all, revenue generated from business operations
belongs to the owner, right?
Cash Sale: customer pays business at time of
sale
Sale on Account: customer does NOT pay at time
of sale but pays business in future.
◦ Since no cash received from customer this sale creates
an asset called Accounts Receivable.
16. Business earns $1,000 in cash sales (REVENUE)
Cash (asset) increases $1,000
◦ $8,100 + $1,000 = $9,100
Capital (Owner’s Equity) increases $1,000
◦ $10,000 + $1,000 = $11,000
◦ The $1,000 is revenue generated from business operations
$9,100 + $1,000 + $1,000 = $100 + $11,000
ASSETS = LIABILITIES + OWNER’S EQUITY
17. Business sells $750 of services on account (REVENUE)
Accounts Receivable (asset) increases $750
◦ $0 + $750 = $750
Capital (Owner’s Equity) increases $750
◦ $11,000 + $750 = $11,750
◦ The $750 is revenue generated from business operations even
though the customer did not actually pay yet.
$9,100 + $750 + $1,000 + $1,000 = $100 + $11,750
ASSETS = LIABILITIES + OWNER’S EQUITY
18. Expense – a cost incurred in operating the
business, DECREASES OWNER’S EQUITY
Expenses are paid in order to support the running
of the business which in turn helps to generate
revenue.
◦ Rent expense
◦ Utilities expense: electricity, water, gas, etc.
◦ Advertising expense: promote business
◦ Telephone expense
◦ Salary expense: pay employees
19. Paid $500 for rent
Cash (asset) decreases $500
◦ $9,100 - $500 = $8,600
Capital (Owner’s Equity) decreases $500
◦ $11,750 - $500 = $11,250
◦ Using the business owner’s asset to pay an expense.
$8,600 + $750 + $1,000 + $1,000 = $100 + $11,250
ASSETS = LIABILITIES + OWNER’S EQUITY
20. Customer pays $750 on account
Cash (asset) increases $750
◦ $8,600 + $750 = $9,350
Accounts Receivable (assets) decreases $750
◦ $750 - $750 = $0
◦ Revenue was previously recognized at time of sale. Customer is
paying an amount they owe business for prior sale on account.
$9,350 + $0 + $1,000 + $1,000 = $100 + $11,250
ASSETS = LIABILITIES + OWNER’S EQUITY
21. Owner withdraws $1,000 from business.
Withdrawals signify assets taken out of the business by
the owner for personal use that do NOT relate to the
business.
Cash (asset) decreases $1,000
◦ $9,350 - $1,000 = $8,350
Capital (Owner’s Equity) decreases $1,000
◦ $11,250 - $1,000 = $10,250
◦ Owner taking asset OUT of business. Since asset no longer in
business the owner no longer has equity.
$8,350 + $0 + $1,000 + $1,000 = $100 + $10,250
ASSETS = LIABILITIES + OWNER’S EQUITY
23. What accounts are affected?
Classify the accounts.
◦ Asset? Liability? Owner’s Equity?
Determine if account is increasing or decreasing.
Does accounting equation remain in balance?
◦ Does left side equal right side?
