Ch.1: Accounting in Action (Cont'd)

Lecture 3
Ch.1: Accounting in Action (Cont’d)

The Basic Accounting Equation
Assets = Liabilities + Owner's Equity
2
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.
4
Liabilities
• Claims against assets (debts and obligations)
• Creditors (party to whom money is owed)
• Accounts Payable, Notes Payable, Salaries and
Wages Payable, etc.
5
Owner’s Equity
• Ownership claim on total assets
• Referred to as Net assets
• Investment by owners and revenues (+)
• Drawings and expenses (-)
6
Equation Assets =Liabilities + Owner's Equity
Owner's
Expanded Owner's Revenue Expense
Assets =Liabilities + - Drawing + -
Equation Capital s s
s
7
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
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
10
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
11
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
12
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.
13
1 - 14
Problem
Transaction “3”: Company bought supplies on account

from Signal Products, $4,320.
14
1 - 15
Problem
Transaction “4”: Company bought another equipment on

account, $20,000.
15
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
16
(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.
17
(6)
1 - 18
Problem “3”
Transaction “7”: Company paid $5000 salaries to

the employees.
18
(7)
1 - 19
Problem “3”
Transaction “8”: Company’s owner withdraw $1000 cash

for his personal use
19
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
20
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

21
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
22
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
23
• Reports changes in owner’s equity for a specific
period of time
• Time period is the same as that covered by the
income statement
24
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)
25
Statement of Cash Flows
• Information on cash receipts and

payments for a specific period of time.
LO 5 26
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
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
28
29

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Lecture 3

Ch.1: Accounting in Action (Cont’d)

Assets = Liabilities + Owner's Equity

Equation Assets =Liabilities + Owner's Equity

Equation Assets = Liabilities + Owner's Equity

Increase in Owner’s Equity

Equation Assets = Liabilities + Owner's Equity

Illustration: Are the following events recorded in the accounting

Criterion Is the financial position (assets, liabilities, or

Transaction “1”: Conner deposited $90,000 in a bank

Transaction “2”: Conner bought equipment, paying

Transaction “3”: Company bought supplies on account

Transaction “4”: Company bought another equipment on

Transaction “5”: Company paid $1,000 rent to the

Transaction “6”: Company provided services to a client

Transaction “7”: Company paid $5000 salaries to

Transaction “8”: Company’s owner withdraw $1000 cash

Statement of Owners’ Equity

The Balance Sheet (Financial Position Statement)

Statement of Cash Flows

Owner’s Equity Statement

Owner’s capital, September 30 $16,450

Total assets €18,050

• Reports revenues and expenses for a specific period of

• Information on cash receipts and

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