Chapter One
Asset, Liability,
Owner’s Equity,
Revenue, and
Expense Accounts
Edited by Nancy Goehring
Edited by Nancy Goehring
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
Copyright © Houghton Mifflin Company. All rights reserved.
1-2
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
Copyright © Houghton Mifflin Company. All rights reserved.
1-3
Fundamental Accounting Equation
• A = L + OE
• Assets = Liabilities + Owner’s Equity
Items
owned
Amounts
owed to
creditors
Copyright © Houghton Mifflin Company. All rights reserved.
Owner’s
investment
1-4
Performance Objective 1
Define and identify asset, liability, and
owner’s equity
Copyright © Houghton Mifflin Company. All rights reserved.
1-5
Define Asset
• Asset
– Cash, properties, and other things of value
owned by an economic unit or business
entity
Copyright © Houghton Mifflin Company. All rights reserved.
1-6
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
Copyright © Houghton Mifflin Company. All rights reserved.
1-7
Define Accounts Receivable
• Accounts Receivable
– An account used or record of the amounts
owed by charge customers (legal claims
against charge customers)
• Look for the words:
– “Sold on account”
Copyright © Houghton Mifflin Company. All rights reserved.
1-8
Define Liability
• Liability
– Debts or amounts owed to creditors
• In one word:
– Debt
Copyright © Houghton Mifflin Company. All rights reserved.
1-9
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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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”
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 11
Define Owner’s Equity
• The owner’s right to or investment in the
business
• A – L = OE
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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 owners are paid
• The Capital account
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 16
Determine Assets
Mr. Stan’s insurance agency has liabilities of
$2,000; his investment (his equity) amounts
to $9,000.
Assets
=
Liabilities
+
Owner’s Equity
?
=
$2,000
+
$9,000
$2,000 Liabilities
9,000 Owner’s Equity
+
=
11,000 Assets
Assets
=
Liabilities
+
Owner’s Equity
$11,000
=
$2,000
+
$9,000
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 17
Determine Owner’s Equity
Mr. Stan’s insurance agency has assets of
$36,000; his liabilities amount to $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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 18
Determine Liabilities
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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 19
Performance Objective 2
Record a group of business transactions,
in column form, involving changes in
assets, liabilities, and owner’s equity
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 22
Some Definitions
• Accounts
– The categories under the Assets,
Liabilities, and Owner’s Equity headings
• 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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 (also
referred to as drawing)
– Treated as a temporary decrease in owner’s
equity
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 24
Steps in Recording a Business Transaction
1. What accounts are involved?
2. What are the classifications of the
accounts involved?
3. Are the accounts increased or
decreased?
4. Is the equation in balance after the
transaction has been recorded?
Remember: each business transaction
must affect at least two accounts
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 25
Recording Transactions (page 10)
Assets
=
Items owned
(a)
Liabilities
Amounts owed to creditors
Cash
=
+ 70,000 =
+ Owner's Equity
Owner's investment
L. P. Arch, Capital
+ 70,000
Transaction (a): Arch deposited $70,000 in a bank
account in the name of business.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 26
Recording Transactions (page 11)
Assets
=
Items owned
Prev. Bal.
(b)
New Bal.
Cash
+
+ 70,000
- 33,000
37,000 +
70,000
Equip.
Liabilities
Amounts owed to creditors
+ Owner's Equity
Owner's investment
=
=
L. P. Arch, Capital
+ 70,000
+ 33,000
33,000 =
=
70,000
70,000
Transaction (b): Bought equipment, paying
cash, $33,000.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 27
Recording Transactions (page 11)
Assets
Cash + Equip.
Prev. Bal. 37,000 + 33,000
(c)
+ 7,000
New Bal. 37,000 + 40,000
77,000
=
Liabilities
=
=
A/P
=
=
+
Owner's Equity
+ L. P. Arch, Capital
+
70,000
+ 7,000
7,000 +
77,000
70,000
Transaction (c): Bought equipment on account
from Melton Office Supply, $7,000.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 28
Recording Transactions (page 12)
Assets
Prev. Bal.
(d)
New Bal.
Cash + Equip.
37,000 +
40,000
- 2,000
35,000 +
40,000
75,000
=
=
=
=
=
Liabilities
+
A/P
+
7,000 +
- 2,000
5,000 +
Owner's Equity
L. P. Arch, Capital
70,000
70,000
75,000
Transaction (d): Paid Melton Office Supply, a creditor,
$2,000.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 29
Recording Transactions (page 12)
Assets
Cash + Equip.
Prev. Bal. 35,000 + 40,000
(e)
+ 6,200
New Bal. 35,000 + 46,200
81,200
= Liabilities + Owner's Equity
=
=
=
=
L. P. Arch,
A/P
+
Capital
5,000 +
70,000
+- 6,200
5,000 +
76,200
81,200
Transaction (e): Arch invested her own personal data
processing equipment in Arch Copy Co. having a fair
market value of $6,200.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 30
Performance Objective 3
Define and identify revenue and expense
accounts
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 31
Define Revenues (page 13)
• 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)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 33
Define Expenses (page 14)
• 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)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Expenses may be paid in cash when
incurred (immediately) or at a later time
• Expense incurred but not paid until later
– Example: Received a bill for a newspaper ad
you took out last week
– Cash will be paid at a later time – involves
Accounts Payable
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 36
Define Chart of Accounts
The official list of account titles to be used to
record the transactions of a business
Chart of Accounts
Assets (100s)
Owner's Equity (300s)
111 Cash
113 Accounts Receivable
117 Prepaid Insurance
311 L. P. Arch
312 L. P. Arch
124 Equipment
Revenues (400s)
, Drawing
411 Income from Services
Liabilities (200s)
Expenses (500s)
221 Accounts Payable
511
512
513
514
515
Copyright © Houghton Mifflin Company. All rights reserved.
Wages Expense
Rent Expense
Supplies Expense
Advertising Expense
Utilities Expense
1 - 37
Performance Objective 4
Record a group of business transactions,
in column form, involving all five elements
of the fundamental accounting equation
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 38
Recording Transactions (page 15)
Assets
= Liabilities +
Cash + Equip. =
Prev. Bal. 35,000 + 46,200 =
(f)
+ 2,520
New Bal.
37,520 + 46,200 =
83,720
=
Owner's Equity
A/P
+ L. P. Arch, Capital +
5,000 +
76,200
5,000 +
Revenue
+ 2,520
(Income from Services)
76,200 +
2,520
83,720
Transaction (f): Arch Copy Co. sold services for cash,
$2,520.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 39
Recording Transactions (page 15)
Assets
=
Cash + Equip. =
Prev. Bal. 37,520 + 46,200 =
(g)
- 700
New Bal.
36,820 + 46,200 =
83,020
=
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue +
5,000 +
76,200 +
2,520
5,000 +
76,200 +
83,020
+
Expenses
+ 700
(Rent Expense)
2,520 700
Transaction (g): Paid rent for the month, $700.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 40
Recording Transactions (page 16)
Assets
Prev. Bal.
(h)
=
Cash
+ Equip. =
36,820 + 46,200 =
Liabilities
A/P
+
+
5,000 +
+ 600
Owner's Equity
L. P. Arch, Capital + Revenue +
76,200 +
2,520 +
Expenses
700
+ 600
(Supplies Expense)
New Bal.
36,820 + 46,200 =
83,020
=
5,600 +
76,200 +
83,020
2,520 -
1,300
Transaction (h): Arch Copy Co. bought supplies (toner
and paper) on credit. These supplies are used
immediately; therefore, they are recorded as an
expense. (New IRS regulations as of 2005.)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 41
Recording Transactions (page 16)
Assets
=
Cash + Equip. + Ppd. Ins. =
Prev. Bal. 36,820 + 46,200
=
(I)
- 360
+360
New Bal. 36,460 + 46,200 +
360 =
83,020
=
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue 5,600 +
76,200 +
2,520 5,600 +
76,200 +
83,020
Expenses
1,300
2,520 -
1,300
Transaction (i): Arch Copy Co. paid $360 for a one-year
liability insurance policy.
(If the insurance is paid in advance for a period longer
than one month, it has value and is therefore recorded
as an asset.)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 42
Recording Transactions (page 17)
Assets
=
Cash + Equip. + Ppd. Ins. =
Prev. Bal. 36,460 + 46,200 +
360 =
(j)
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue - Expenses
5,600 +
76,200 +
2,520 1,300
+ 200
+ 200
(Advertising Expense)
New Bal.
36,460 + 46,200 +
83,020
360 =
=
5,800 +
76,200 +
2,520 -
1,500
83,020
Transaction (j): Arch Copy Co. received a bill for an
expense.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 43
Recording Transactions (page 17)
Assets
=
Liabilities
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 36,460 + 46,200 +
360
=
(k)
+ 1,050
New Bal.
36,460 + 46,200 +
360 +
84,070
1,050 =
=
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue Expenses
5,800 +
76,200 +
2,520 1,500
+ 1,050
(Income from Services)
5,800 +
76,200 +
3,570 1,500
84,070
Transaction (k): Arch Copy Co. completed a printing job
and billed Walker Company $1,050 for services
performed.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 44
Recording Transactions (page 18)
Assets
=
Liabilities
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 36,460 + 46,200 +
360 +
1,050 =
(l)
- 1,800
New Bal. 34,660 + 46,200 +
360 +
1,050 =
82,270
=
A/P
+
Owner's Equity
+ L. P. Arch, Capital +
5,800 +
76,200 +
- 1,800
4,000 +
76,200 +
82,270
Revenue
- Expenses
3,570 1,500
3,570 -
1,500
Transaction (l): Arch Copy Co. paid $1,800 to Melton
Office Supply, its creditor, as part payment on account
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 45
Recording Transactions (page 18)
Assets
=
Items owned
Liabilities
+
Owner's Equity
Amounts owed to creditors
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 34,660 + 46,200 +
360 +
1,050 =
(m)
- 160
A/P
Owner's investment
+ L. P. Arch, Capital + Revenue - Expenses
4,000 +
76,200 +
3,570 1,500
+ 160
(Utilities Expense)
New Bal.
34,500 + 46,200 +
360 +
82,100
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.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 46
Recording Transactions (page 19)
Assets
=
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 34,500 + 46,200 +
360 +
1,050 =
(n)
- 200
New Bal. 34,300 + 46,200 +
360 +
1,050 =
81,910
=
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue 4,000 +
76,200 +
3,570 - 200
3,800 +
76,200 +
3,570 81,910
Expenses
1,660
1,660
Transaction (n): Arch Copy Co. pays on account $200 to
the City News for advertising.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 47
Recording Transactions (page 19)
Assets
=
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 34,300 + 46,200 +
360 +
1,050 =
(o)
- 2,130
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue - Expenses
3,800 +
76,200 +
3,570 1,660
+ 2,130
(Wages Expense)
New Bal.
32,170 + 46,200 +
360 +
79,780
1,050 =
=
3,800 +
76,200 +
3,570 -
3,790
79,780
Transaction (o): Arch Copy Co. pays wages for a parttime employee, $2,130.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 48
Recording Transactions (page 19)
Assets
=
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 32,170 + 46,200 +
360 +
1,050 =
(p)
- 620 + 3,520
New Bal. 31,550 + 49,720 +
360 +
1,050 =
82,680
=
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue 3,800 +
76,200 +
3,570 + 2,900
6,700 +
76,200 +
3,570 82,680
Expenses
3,790
3,790
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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 49
Recording Transactions (page 19)
Assets
=
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 31,550 + 49,720 +
360 +
1,050 =
(q)
+ 850
- 850
New Bal. 32,400 + 49,720 +
360 +
200 =
82,680
=
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue - Expenses
6,700 +
76,200 +
3,570 3,790
6,700 +
76,200 +
3,570 -
3,790
82,680
Transaction (q): Arch Copy Co. receives $850 cash on
account from a credit customer.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 50
Recording Transactions (page 20)
Assets
=
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
Prev. Bal. 32,400 + 49,720 +
360 +
200 =
(r)
+ 4,220
New Bal.
36,620 + 49,720 +
360 +
86,900
200 =
=
Liabilities
A/P
+
Owner's Equity
+ L. P. Arch, Capital + Revenue - Expenses
6,700 +
76,200 +
3,570 3,790
+ 4,220
(Income from Services)
6,700 +
76,200 +
7,790 3,790
86,900
Transaction (r): Arch Copy Co. receives revenue from
cash customers for the rest of the month, $4,220
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 51
Recording Transactions (page 20)
Assets
Prev. Bal.
(s)
New Bal.
=
Liabilities
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
36,620 + 49,720 +
360 +
200 =
- 2,500
34,120 + 49,720 +
360 +
84,400
200 =
=
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
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 52
Recording Transactions
Assets
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. =
34,120 + 49,720 +
360
+
200
=
Left Side Equals Sign
Cash
Accts. Rec.
Ppd. Ins.
Equip.
A/P
6,700
=
34,120
49,720
360
200
Copyright © Houghton Mifflin Company. All rights reserved.
Owner's Equity
+ L. P. Arch, Capital + Revenue +
73,700
+
7,790 -
_______
Expenses
3790
Right Side Equals Sign
A/P
L. P. Arch, Capital
Revenue
Expenses
6,700
73,700
7,790
3,790
1 - 53
Demonstration Problem
• We will be recording business transactions
for a company with the following details:
Owner name:
James Kirk
Business name: James Kirk, CPA
Business type: Sole proprietorship
(one-person business)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 54
Demonstration Problem
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 55
Demonstration Problem
(a) Deposited $13,500 in a bank account in the
name of the business
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 56
Demonstration Problem
(b) Paid rent for the month, $1,600 (Rent
Expense)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 57
Demonstration Problem
(c) Bought equipment, including a computer and a
printer, for $9,500 from Bingham Company. Paid $6,700
in cash, with the balance due in thirty days.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 58
Demonstration Problem
(d) Purchased office supplies and
announcements for $970 from City Stationers.
Payment is due in 30 days.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 59
Demonstration Problem
(e) Billed clients $5,500 for services rendered (Client Fees).
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 60
Demonstration Problem
(f) Paid $1,450 salary to secretary/assistant for the month.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 61
Demonstration Problem
(g) Paid telephone bill of $210 (Telephone Expense).
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 62
Demonstration Problem
(h) Received cash from clients previously billed on account, $2,450.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 63
Demonstration Problem
(i) Paid Bingham Company $970 on account.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 64
Demonstration Problem
(j) Paid $275 for continuing education course (Miscellaneous
Expense)
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 65
Demonstration Problem
(k) Kirk withdrew $2,200 for personal use.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 66
Demonstrate that the total of one side of the equation
equals the total of the other side of the equation.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 67
In-class and Homework Assignments
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 68