Lecture 3
Ch.1: Accounting in Action (Cont’d)
The Basic Accounting Equation
Assets = Liabilities + Owner's Equity
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1-3
Exercise
Required: Using the following general accounts, classify the following items under its
appropriate account
Owner, Equity
Assets Liabilities Owner, Owner, Revenues Expenses
Capital withdrawals
Cash
Accounts
Payable
Equipment
Sales Revenue
Notes Payable
Rent Expense
Owner,
Investment
Accounts
Receivable
Owner,
withdrawals 3
The Accounting Equation
Assets
• Resources a business owns
• Provide future services or benefits
• Cash, Supplies, Equipment, Accounts Receivable
etc.
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The Accounting Equation
Liabilities
• Claims against assets (debts and obligations)
• Creditors (party to whom money is owed)
• Accounts Payable, Notes Payable, Salaries and
Wages Payable, etc.
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The Accounting Equation
Owner’s Equity
• Ownership claim on total assets
• Referred to as Net assets
• Investment by owners and revenues (+)
• Drawings and expenses (-)
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The Accounting Equation
Equation Assets =Liabilities + Owner's Equity
Owner's
Expanded Owner's Revenue Expense
Assets =Liabilities + - Drawing + -
Equation Capital s s
s
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The Accounting Equation
Equation Assets = Liabilities + Owner's Equity
Expanded Owner's Owner's
Assets = Liabilities + - + Revenues - Expenses
Equation Capital Drawings
Increase in Owner’s Equity
• Investment by Owner. Assets the owner puts into the
business
• Revenues. Increases in assets or decreases in liabilities
resulting from sale of goods or performance of services in
normal course of business 8
The Accounting Equation
Equation Assets = Liabilities + Owner's Equity
Expanded Owner's Owner's
Assets = Liabilities + - + Revenues - Expenses
Equation Capital Drawings
Decrease in Owner’s Equity
• Drawings. A withdraw of cash or other assets
for personal use
• Expenses. Cost of assets consumed or services
used in the process of earning revenue 9
DO IT! Owner’s Equity Effects
Classify the following items as investment by owner, owner’s drawings,
revenues, or expenses. Then indicate whether each item increases or
decreases owner’s equity.
Effect
Classification on Equity
1. Rent Expense Expense Decrease
2. Service Revenue Revenue Increase
Owner’s
3. Drawings Decrease
Drawings
4. Salaries and Wages Expense Expense Decrease
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Analyzing Business Transactions-
Transactions identification Process
Illustration: Are the following events recorded in the accounting
records?
Hiring the
Purchase company’s
Event computer President Pay rent
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Record/
Don’t Record Yes No Yes
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Summary of Transactions
1. Each transaction analyzed in terms of effect on:
a. Three components of basic accounting
equation
• Assets
• Liabilities
• Owner’s equity
b. Specific types of items, such as Cash
2. Two sides of equation must always be equal
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1 - 13
Problem
Transaction “1”: Conner deposited $90,000 in a bank
account in the name of the business.
Transaction “2”: Conner bought equipment, paying
cash, $38,000.
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Problem
Transaction “3”: Company bought supplies on account
from Signal Products, $4,320.
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Problem
Transaction “4”: Company bought another equipment on
account, $20,000.
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1 - 16
Problem “3”
Transaction “5”: Company paid $1,000 rent to the
landlord of the building where its business is located.
By definition,
increases in
expenses result
in decrease in
equity
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(5)
1 - 17
Problem “3”
Transaction “6”: Company provided services to a client
for $10,000, the company collected $2,000 immediately
and the rest will be received within one month.
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(6)
1 - 18
Problem “3”
Transaction “7”: Company paid $5000 salaries to
the employees.
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(7)
1 - 19
Problem “3”
Transaction “8”: Company’s owner withdraw $1000 cash
for his personal use
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The Four core Financial Statements
The Income Statement ( Profit /Loss statement)
Statement of Owners’ Equity
The Balance Sheet (Financial Position Statement)
Statement of Cash Flows
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Financial Statements
Income Statement
Revenues €4,700
Service revenue
Expenses
Softbyte Salaries and wages expense 900
statements for the Rent expense 600
Month Ended Advertising expense 250
September 30, 2020 Utilities expense 200
Total expenses 1,950
Net income €2,750
Owner’s Equity Statement
Owner’s capital, September 1 € 0
Add: Investments 15,000
Add: Net income 2,750
Less: Drawings 1,300
Owner’s capital, September 30 $16,450
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Financial Statements
Owner’s Equity Statement
Owner’s capital, September 1 € 0
Add: Investments 15,000
Add: Net income 2,750
Less: Drawings 1,300
Softbyte Owner’s capital, September 30 €16,450
statements for the
Month Ended Statement of Financial Position
September 30, 2020 Assets
Cash € 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets €18,050
Owner’s Equity and Liabilities
Accounts payable € 1,600
Owner’s capital 16,450
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Total owner’s equity and liabilities €18,050
Income Statement
• Reports revenues and expenses for a specific period of
time
• Lists revenues first, followed by expenses
• Shows net income (or net loss)
• Does not include investment and withdrawal transactions
between owner and business in measuring net income
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Owner’s Equity Statement
• Reports changes in owner’s equity for a specific
period of time
• Time period is the same as that covered by the
income statement
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Statement of Financial Position
• Reports assets, liabilities, and owner's equity at a
specific date
• Lists assets at top, followed by liabilities and owner’s
equity
• Total assets must equal total owner’s equity and
liabilities
• Snapshot of company’s financial condition at a specific
moment in time (usually month-end or year-end)
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Statement of Cash Flows
• Information on cash receipts and
payments for a specific period of time.
LO 5 26
Financial Statements
Which of the following financial statements is prepared
as of a specific date?
a. Statement of financial position
b. Income statement
c. Owner's equity statement
d. Statement of cash flows
Ans.: a
LO 5 27
Financial Statements
Net income will result during a time period when:
a. assets exceed liabilities
b. assets exceed revenues
c. expenses exceed revenues
d. revenues exceed expenses
Ans.: d
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