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The Accounting Equation

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Title: Chapter 2 Author: Susan Coomer Galbreath Last modified by: Rohan Chambers Created Date: 5/15/1998 1:26:06 PM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: The Accounting Equation


1
The Accounting Equation
A L OE
Simple
A L OE

R - E
Expanded
Net Profit belongs to Owners therefore increase
owners equity
2
Balance Sheet A Starting Point
3
Assets
  • Assets
  • resources controlled by the enterprise
  • past events
  • provide future economic benefits

4
Liabilities
  • Liabilities
  • present obligation
  • past events
  • future outflows of economic benefits

5
Owners Equity
  • Owners equity
  • the residue of Assets over Liabilities
  • represents the owners claim in the business.

6
Owners Equity
Changes in Owners Equity
  • Owners Withdrawals
  • Business Losses
  • Owners Investments
  • Business Earnings

7
The Accounting Equation
Assets Liabilities Owners
Equity 300,000 80,000 220,000
8
Lets analyze some transactions for JJs Lawn
Care Services.
9
The Effects of Business Transactions
On May 1, 2001, Jill Jones deposited 8,000 in
the bank to officially start JJs Lawn Care
Service.
10
The Effects of Business Transactions
11
The Effects of Business Transactions
On May 2, 2001, JJs purchased a riding lawn
mower for 2,500 cash.
12
The Effects of Business Transactions
13
The Effects of Business Transactions
On May 8, 2001, JJs purchased a 15,000
truck. JJs paid 2,000 down in cash and issued a
note payable for the remaining 13,000.
14
The Effects of Business Transactions
15
The Effects of Business Transactions
On May 11, 2001, JJs purchased some repair parts
for 300 on account.
16
The Effects of Business Transactions
17
The Effects of Business Transactions
On May 18, 2001, JJs sold half of their repair
parts to ABC Lawns for 150, a price equal to
JJs cost. JJs will receive the cash within 30
days.
18
The Effects of Business Transactions
19
The Effects of Business Transactions
On May 25, 2001, ABC Lawns pays JJs 75 as a
partial settlement of its accounts receivable.
20
The Effects of Business Transactions
21
The Effects of Business Transactions
On May 28, 2001, JJs pays 150 of its accounts
payable.
22
The Effects of Business Transactions
23
The Effects of Business Transactions
On May 29, 2001, JJs recorded lawn care services
provided during May of 750. All clients paid in
cash.
24
The Effects of Business Transactions
25
The Effects of Business Transactions
On May 31, 2001, JJs purchased gasoline for the
lawn mower and the truck for 50 cash.
26
The Effects of Business Transactions
27
The Effects of Business Transactions
Lets review how JJs transactions affected the
accounting equation.
28
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29
These transactions impact the Statement of Cash
Flows.
These transactions impact the Income Statement.
30
Lets prepare the Income Statement and Statement
of Cash Flows for JJs Lawn Care Service for the
month ending May 31, 2001.
31
Investments and withdrawals by the owner are not
included on the Income Statement.
32
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33
Operating activities include the cash effects of
revenue and expense transactions.
34
Investing activities include the cash effects of
purchasing and selling assets.
35
Financing activities include the cash effects of
transactions with the owner and creditors.
36
Relationships Among Financial Statements
Beginning of period
End of period
Time
Balance Sheet
Balance Sheet
Income Statement Statement of Cash Flows
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