Chapter 1
The Accounting Equation
General Info
• Accounting is the language of business!
• Understanding accounting helps managers &
owners make better business decisions.
• Failure to understand accounting info. can result
in poor business decisions.
• Inaccurate accounting records often contribute
to business failure and bankruptcy.
ENRON!
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LESSON 1-1
What does an accountant do?
•Plans, records, analyzes, and interprets financial records
•Handles a broad range of responsibilities
•These are skills successful businesses cannot do without.
•If you are good, the sky’s the limit.
Is Accounting Boring?
• Will it lead you to a career in the
spotlight?
• Brad Pitt staring in an action thriller
about a jet setting accountant???
• Who develops and approves the budget
for his films to go into production?
• Who advises Mr. Pitt how to invest his
salary?
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1-1 New Vocabulary
• Service Business
– A business that performs an activity for a fee
• Examples:
• Dr. Moser
• Marcy Allen-Klaus, Attorney
• Sole Proprietorship—Proprietor means
“owner”.
– A business owned by one person.
•
•
•
•
Examples:
Tresses
Dr. Haines
Mike’s Landscaping
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Proprietorships
• Advantages
– Easy to set up
– All profits go to the owner
– Owner has total control
– Few regulations to follow
• Disadvantages
Consider: Do
the advantages
outweigh the
disadvantages?
– Limited expertise
– Hard to raise money
– Owner has all the risks
– Hard to attract talented1-2employees
6
THE ACCOUNTING EQUATION
page 8
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Key Terms
• Asset– Anything of value that is owned. They can be
used to acquire other assets or be used to
operate a business.
For your note card:
•
•
•
•
•
Cash
Accounts Receivable
Supplies
Insurance
Petty Cash
Key Terms
• Equities– Financial rights to the assets of a business.
• Liability- (DEBT)
– An amount owed by a business (at a later date).
• Accounts Payable (on note card)
Yes, More Terms
Owner’s Equity(the value of ownership)
• The amount remaining after the value of all
liabilities is subtracted from the value of all
assets.
• Assets-Liabilities = Owner’s Equity
Financial Claims
• Property = Creditor’s Financial Claim +
Owner’s Financial Claim
– Truck
– $20,000
• Assets =
=
15,000
+
5,000
Liabilities + Owner’s Equity
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The Accounting Equation
• Shows the relationship among assets,
liabilities and owner’s equity.
• Assets =
Liabilities + Owner’s Equity
– Left side amounts =
Right side amounts
• It must be in balance to be correct
• Remember: An equation must always have
equal amounts on each side of the equal
signs
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The Accounting Equation
• Assets
= Liabilities + Owner’s Equity
Left side amounts
=
Right side amounts
150
=
60
+
?
475
333
=
275
+
?
90
200
=
?
111
+
222
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Audit Your Understanding
• Give examples of service businesses
– Dry Cleaners
– Doctor’s Office
– Auto Repair
• What is a proprietorship?
– A business owned by one person
• State the accounting equation
– Assets = Liabilities + Owner’s Equity
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Work Together 1-1
• On the O: drive
– We will do this together
ON YOUR OWN
– Just like it says, you will be doing this by yourself
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LESSON 1-2
How Business Activities
Change the Accounting Equation
Quick Review
• What is the Accounting Equation?
• What is a Proprietorship?
1-2 – Notecard Time!!!
• Note card #1
–Assets
• Cash
• Petty Cash
• Accounts Receivable
• Supplies
• Prepaid Insurance
#1
1-2 – Notecard Time!!!
• Note card #2
–Liabilities
• Accounts Payable
#2
1-2 – Notecard Time!!!
• Note card # 3
–Owner’s Equity
• Capital
• Drawing
#3
Accounting Concepts
• Business Entity: This concept is applied when a
business’s financial information is recorded and
reported separately from the owner’s personal
financial information.
– Example: house, personal car, personal belongings
• Unit of measurement: Business transactions are
stated in numbers that have common values; that
is, using a common unit of measurement.
– Example: Canadian dollar
• Realization of Revenue: Revenue is
recorded at the time goods or services are
sold.—even if it is a charge
sale
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New Vocabulary
• Transaction: A business activity that changes
assets, liabilities, or owner’s equity. Example: paid
cash for supplies
• Account: A record summarizing all the information
pertaining to a single item in the accounting
equation. Example: Cash
• Account Title: The name given to an account.
• Account Balance: The amount in an account.
• Capital: The account used to summarize the
owner’s equity in a business. Example: Travis
Smith, Capital
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RECEIVING CASH
page 10
Transaction 1 August 1. Received cash from owner as an
investment, $5,000.00.
+5,000
+5,000 inv.
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PAYING CASH
page 11
Transaction 2 August 3. Paid cash for supplies, $275.00.
-275 +275
-1200
+1200
Transaction 3 August 4. Paid cash for insurance,
$1,200.00.
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TRANSACTIONS ON ACCOUNT
page 12
Transaction 4 August 7. Bought supplies on account
from Supply Depot, $500.00.
+500
-300
+500
-300
Transaction 5 August 11. Paid cash on account
to Supply Depot, $300.00.
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Audit Your Understanding
What must be done if a transaction increases the left
side of the accounting equation?
• The right side must also be increased
How can a transaction affect only one side of the
accounting equation?
• If one account is increased, another account on the
same side of the equation must be decreased by the
same amount.
To what does the phrase “on account” refer?
• Buying items and paying for them at a later date.
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LESSON 1-3
How Transactions Change Owner’s Equity
in an Accounting Equation
New Vocabulary
• Revenue: An increase in owner’s equity
resulting from the operation of a business.
• Sales on Account: A sale for which cash will
be received at a later date. (A.K.A. charge
sale)
• Expense: A decrease in owner’s equity
resulting from the operation of a business.
• Withdrawals: Assets taken out of the
business for the owner’s personal use.
(decreases Owner’s1-2Equity)
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REVENUE TRANSACTIONS
page 14
Transaction 6 August 12. Received cash from
sales, $295.00.
+295
+295 rev.
+350
+350 rev.
Transaction 7 August 12. Sold services on
account to Oakdale School, $350.00.
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EXPENSE TRANSACTIONS
page 15
Transaction 8 August 12. Paid cash for rent,
$300.00.
-300
-40
Transaction 9 August 12. Paid cash for
telephone bill, $40.00. 1-2
-300 (exp.)
-40 (exp.)
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OTHER CASH TRANSACTIONS
page 16
Transaction 10 August 12. Received cash on
account from Oakdale School, $200.00.
+200 -200
-125
-125 withdrawal
Transaction 11 August 12. Paid cash to owner
for personal use, $125.00.
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Audit Your Understanding
How is owner’s equity affected when cash is
received from sales?
• increased
How is owner’s equity affected when services
are sold on account?
• increased
How is owner’s equity affected when cash is
paid for expenses?
• decreased
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Work Together
• Download it from my site
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