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ACCOUNTING 101

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ACCOUNTING 101 CHAPTER ONE: Asset, Liability, Owner s Equity,Revenue, and Expense Accounts The Fundamental Accounting Equation Assets=Liabilities+Owner s Equity ... – PowerPoint PPT presentation

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Title: ACCOUNTING 101


1
ACCOUNTING 101
  • CHAPTER ONE
  • Asset, Liability, Owners Equity,Revenue, and
    Expense Accounts

2
The Fundamental Accounting Equation
  • AssetsLiabilitiesOwners Equity
  • The three major classifications
  • ALOE, the memory tool

3
ASSETS
  • Property or things of value owned by an economic
    unit
  • CASH
  • SUPPLIES
  • EQUIPMENT
  • BUILDING
  • LAND

4
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

5
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.

6
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

7
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!

8
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!

9
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!

10
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!

11
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!

12
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

13
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

14
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?

15
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!

16
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.

17
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

18
Review these Transactions
  • p13-Summary of Transactions a-e

19
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

20
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

21
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

22
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

23
Introducing new Asset Accounts
  • Prepaid Insurance p18
  • Accounts Receivable

24
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

25
The Demonstration Problem
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