ACCOUNTING 101

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ACCOUNTING 101

• CHAPTER ONE
• Asset, Liability, Owners Equity,Revenue, and
  Expense Accounts

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The Fundamental Accounting Equation

• AssetsLiabilitiesOwners Equity
• The three major classifications
• ALOE, the memory tool

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ASSETS

• Property or things of value owned by an economic
  unit
• CASH
• SUPPLIES
• EQUIPMENT
• BUILDING
• LAND

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OWNERS EQUITY

• Owners equity owners claim, investment, net
  worth, or proprietorship
• Owners name followed by the word CAPITAL
• Owner withdrawals of cash or assets for personal
  use

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Partial Equation

• ASSETSOWNERS EQUITY
• Property or things of value owned by the
  businessOwners right to or investment in the
  business
• Assets (60,000)OE (60,000)(p8)
• Here, nothing is owed against the assetsno
  liabilities.

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LIABILITIES

• Liabilities are debts or amounts owed to the
  creditors
• The business entity may have bought goods or
  services on credit or borrowed money or created
  some obligation to pay
• Creditors claims to business assets have
  priority over the owners claim

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The Fundamental Accounting Equation

• AssetsLiabilities Owners Equity
• ? 4,000 16,000
• 20,000 4,000 16,000 (p9)
• 20,000 ? 16,000
• 20,000 4,000 ?
• The equation must stay in balance!

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Finding the unknown part of the equation

• Determine the owners equity
• Assets Liabilities Owners Equity
• 38,000 5,000 ?
• Do the math!33,000 (OE)
• 38,000 5,000 33,000
• Balanced!

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Finding the unknown part of the equation

• Determine the liabilities
• Assets Liabilities Owners Equity
• 68,000 ? 22,000 (p9)
• Do the math!
• 68,000 46,000 22,000
• Balanced!

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Recording Business Transactions

• Remember? Business transactions are events that
  effect the operations of the economic unit.
• Each business transaction must be recorded under
  the appropriate three classifications and then
  the appropriate account under these
  classifications
• Each side of the equation must always balance!

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Recording Business Transactions

• Owner (Cline) deposits 82,000 in a bank account
  in name of business (separate entity). (P10)
  Transaction (a)
• Asset(classification)Liabilities(class-ification)
  Owners Equity (classification)
• Asset/Cash (Account)Liabilities Owners
  Equity/Capital (Account)
• 82,000Asset/Cash 82,000/Capital/OE
• Balanced with no Liabilities!

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Recording Business Transactions

• Cline buys equipment paying 64,000 cash out of
  the 82,000 cash on hand in bank (see p11)
• Cash goes down by 64,000
• Cash remaining is 18,000
• Equipment goes up by 64,000
• Left side of equation is still 82,000 and is
  balanced with right side!
• 64,000 from cash account and 64,000 into
  equipment account is a double-entry notation

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Double-Entry Accounting

• Double-entry means that each transaction must be
  recorded in at least two accounts keeping the
  equation in balance
• Review Transaction (b) on p. 11
• Two entries were made 64,000 taken out of cash
  account
• 64,000 put into equipment account
• Cash and equipment are assets and found on the
  left side of the equation

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Another Business Transaction

• What if we buy equipment on account or on credit?
  See p. 11 Transaction (c )
• Cline buys 10,000 of equipment on account
  creating a liability
• Equipment (Asset) increases by 10,000 on left
  side of equation
• Accounts Payable (Liability) increases by 10,000
  on right side of equation
• Each side is now totaled at 92,000 and balanced
  but how and why?

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Double-entry Accounting

• Review Transaction (c ) again p11
• We increased the Assets by 10,000 by buying more
  Equipment (an asset). Asset classifications are
  located on left side of equation and Equipment is
  an asset account
• We increased our Liabilities by 10,000 by buying
  more equipment on credit.
• Therefore, the Accounts Payable account under the
  Liabilities classification is increased over on
  the right side of the equation. Ah-Ha! A
  double-entry!

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Double-entry Accounting

• Please look at Transaction (d) p12
• Here we pay down the Accounts Payable by 6,000
  leaving a balance of 4,000 in this account
• We take the 6,000 out of the Cash Account to pay
  down Accounts Payable leaving 12,000 in cash.
• Therefore, Cash is reduced AND Accounts Payable
  is reduced!
• Another double-entry notation and we still
  balance left side to right side.

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Double-entry AccountingAnother Business
Transaction

• Owner invests equipment into business valued at
  6,200-Transaction (e)
• This will increase the Equipment Account balance
  by 6,200 as well as the Capital Account balance
  by 6,200
• Again, another double-entry notation one on the
  left side and one on the right side!
• The balance now is 92,200 left and right

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Review these Transactions

• p13-Summary of Transactions a-e

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Chart of Accounts

• Official list of accounts tailor-made for the
  business by the Accountant. Any changes must be
  approved by Management
• Assets 100s see p14
• Liabilities 200s
• Owners Equity 300
• Revenue (increase in OE) 400s
• Expenses (decrease in OE) 500s

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Revenue and Expense Accounts

• These fall under the Owners Equity
  classification
• Revenue (Income) increases Owners Equity
• Expenses (Bills) decrease Owners Equity
• Revenue is recognized when earned whether in cash
  or sold on credit
• Cash revenue will increase the Cash Account
• Services sold on credit will increase Accounts
  Receivable account

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Revenue example

• P15 Transaction (f) Company sold services for
  cash in the amount of 3,520. Revenue Account is
  increased by 3,520 and the Cash Account is
  increased by 3,520 (left side and right side
  double-entry notation)
• Each side is balanced

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Expense example

• P15 Transaction (g) Company paid the rent for the
  month in amount of 900.
• Cash Account is decreased by 900
• Rent Expense Account (under the Expense
  classification) is increased by 900

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Introducing new Asset Accounts

• Prepaid Insurance p18
• Accounts Receivable

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Summary of Sample Transaction p21

• Lets take a look at p21 in text
• Transactions f-s
• What happened at Clines Computer?
• Some things happened on the left side of the
  equation Cash, Equipment, Prepaid Insurance,
  Accounts Receivable
• Some things happened on the right side of the
  equation Accounts Payable, Cline/ Capital,
  Revenue, and then less Expenses
• 96,77096,770 Balanced

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The Demonstration Problem