Accounting%20Equation

1
Accounting Equation
Assets Claims

• Claims on the assets are from two sources
• Creditors (liabilities)
• Investors or owners (equity).

Assets Liabilities Equity
2
Accounting Equation
Assets Liabilities Equity
3
Accounting Equation
Assets Liabilities Equity

Assets Liabilities Stockholders' Equity
4
ACCOUNTING EQUATION

• Assets Claims to Assets
• Assets Liabilities Owners Equity
• Owners Equity Common Stock AND R. E.
• Dividends Revenues Expenses
• (Net Income)

5
Transaction Analysis

• What is a transaction?
• a business event involving a transfer of
  something of value between entities
• What is transaction analysis?
• determining the effect of a business event on the
  financial statements
• Where do you start?
• First, UNDERSTAND THE BUSINESS EVENT
• Second, determine the transactions effects on
  the accounting equation -- UNDERSTAND IT
• Third, determine the effects on the financial
  statements UNDERSTAND IT

6
Recording Business Events Under the Accounting
Equation

• Businesses obtain assets from three sources
• Owners
• Creditors
• Profitable Operations

Now, lets look at the effects of some
transactions on the accounting equationNotice
that EVERY transaction in Ch. One involves
Cashthat will NOT be true after this chapter.
7
Illustration Rustic Camp Sites (RCS)

• Use the Transaction Worksheet that I Provided to
  Record RSC Transactions on the next several
  slides.
• The completed worksheet is available as an avi
  file.

8
Event 1 Rustic Camp Sites (RCS) was formed on
January 1, 2004, when it acquired 120,000 cash
from issuing 35,000 shares of common stock.
Double-Entry Bookkeeping
9
Event 2 RCS acquired an additional 400,000 of
cash by borrowing from a creditor.
10
Event 3 RCS paid 500,000 cash to purchase land.
11
Event 4 RCS obtained 85,000 cash by leasing
campsites to customers.
12
Event 5 RCS paid 50,000 cash for operating
expenses such as salaries, rent, and interest.
13
Event 6 RCS paid 4,000 in cash dividends to
its owners.
14
Event 7 The land that RCS paid 500,000 to
purchase had an appraised market value of
525,000 on December 31, 2004.
15
Summary of Transactionsas presented in a
Transaction Worksheet
Color Code Legend Green numbers used in the
statement of cash flows Red numbers used in the
balance sheet Blue numbers used in the income
statement
Now, lets prepare the financial statements for
RCS using the data presented above.