FINANCIAL STATEMENTSThe Accounting Equation

CHAPTER-1(A) LEARNING QBJECTIVES

LO-1 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets = Liabilities + Owners Equity. LO-2 Describe how the equation serves as the basis for elementary transaction analysis. LO-3 Explain how the statement of financial position, often referred to as the balance sheet, is an expansion of the basic accounting equation.

Accounting Principles
Entity Concept

Reliability

Cost

Going Concern

Monetary Unit
3

Copyright (c) 2009 Prentice Hall. All rights reserved.

Accounting Principles
Entity Concept
A business is separate from its owners

Reliability
Accounting information is accurate and free from bias

Cost
Assets are recorded at purchase price
Copyright (c) 2009 Prentice Hall. All rights reserved. 4

Accounting Principles (continued)

Going Concern
Assumption that business will continue indefinitely

Monetary Unit
In the U.S. amounts are recorded in dollars The dollar is considered a stable unit of measure
Copyright (c) 2009 Prentice Hall. All rights reserved. 5

The Accounting Equation

Resources

What are an organizations resources called?

The Accounting Equation

Resources = Sources

Assets

Cost of resources used in the business

What are the sources of the assets?

The Accounting Equation

Resources = Sources

Liabilities Assets Owners Equity

Resources supplied by creditors and owners

Cost of resources used in the business

Effects of Transactions on Owners Equity

OWNERS EQUITY

Effects of Transactions on Owners Equity

OWNERS EQUITY decreased by

Effects of Transactions on Owners Equity

OWNERS EQUITY decreased by

Owners withdrawals

Expenses

Effects of Transactions on Owners Equity

OWNERS EQUITY increased by

Effects of Transactions on Owners Equity

OWNERS EQUITY increased by

Owners investments Revenues

Effects of Transactions on Owners Equity

OWNERS EQUITY decreased by increased by

Owners withdrawals

Owners investments Revenues

Expenses

Effects of Transactions on Owners Equity

OWNERS EQUITY decreased by increased by

Owners withdrawals

Owners investments Revenues

Expenses

NET INCOME

Business Transactions
a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS LIABILITIES

OWNERS EQUITY

Business Transactions
a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS LIABILITIES

Cash 25,000

OWNERS EQUITY

Business Transactions
a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS LIABILITIES

Cash 25,000

OWNERS EQUITY

Chris Clark, Capital 25,000

Business Transactions
b. NetSolutions buys land for $20,000.

ASSETS

LIABILITIES

OWNERS EQUITY

Business Transactions
b. NetSolutions buys land for $20,000.

ASSETS

LIABILITIES

Cash (20,000)

OWNERS EQUITY

Business Transactions
b. NetSolutions buys land for $20,000.

ASSETS

LIABILITIES

Cash (20,000) Land 20,000

OWNERS EQUITY

Business Transactions
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
ASSETS LIABILITIES

OWNERS EQUITY

Business Transactions
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
ASSETS LIABILITIES

Supplies 1,350

OWNERS EQUITY

Business Transactions
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
ASSETS LIABILITIES

Supplies 1,350

Accounts Payable 1,350

OWNERS EQUITY

Business Transactions
d. NetSolutions earns fees of $7,500, receiving cash.

ASSETS

LIABILITIES

OWNERS EQUITY

Business Transactions
d. NetSolutions earns fees of $7,500, receiving cash.

ASSETS

LIABILITIES

Cash 7,500

OWNERS EQUITY

Business Transactions
d. NetSolutions earns fees of $7,500, receiving cash.

ASSETS

LIABILITIES

Cash 7,500

OWNERS EQUITY

Fees Earned 7,500

Business Transactions
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
ASSETS LIABILITIES

OWNERS EQUITY

Business Transactions
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
ASSETS LIABILITIES

Cash (3,650)

OWNERS EQUITY

Business Transactions
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
ASSETS LIABILITIES

Cash (3,650)

OWNERS EQUITY

Expenses (3,650)

Business Transactions
f. NetSolutions pays $950 to creditors on account.

ASSETS

LIABILITIES

OWNERS EQUITY

Business Transactions
f. NetSolutions pays $950 to creditors on account.

ASSETS

LIABILITIES

Cash (950)

OWNERS EQUITY

Business Transactions
f. NetSolutions pays $950 to creditors on account.

ASSETS

LIABILITIES

Accounts Payable (950) Cash (950)

OWNERS EQUITY

Business Transactions
g. At the end of the month, the cost of supplies on hand is $550.
ASSETS LIABILITIES

OWNERS EQUITY

Business Transactions
g. At the end of the month, the cost of supplies on hand is $550.
ASSETS LIABILITIES

Supplies (800)

OWNERS EQUITY

Business Transactions
g. At the end of the month, the cost of supplies on hand is $550.
ASSETS LIABILITIES

Supplies (800)

OWNERS EQUITY

Supplies Expense (800)

Business Transactions
h. Chris Clark withdraws $2,000 in cash.
ASSETS LIABILITIES

OWNERS EQUITY

Business Transactions
h. Chris Clark withdraws $2,000 in cash.
ASSETS LIABILITIES

Cash (2,000)

OWNERS EQUITY

Business Transactions
h. Chris Clark withdraws $2,000 in cash.
ASSETS LIABILITIES

Cash (2,000)

OWNERS EQUITY

Chris Clark, Drawing (2,000)

Transaction Summary
ASSETS
LIABILITIES

Cash Supplies Land

5,900 550 20,000

OWNERS EQUITY

Transaction Summary
ASSETS
LIABILITIES Accts. Payable 400

Cash Supplies Land

5,900 550 20,000

OWNERS EQUITY

Transaction Summary
ASSETS
LIABILITIES Accts. Payable 400

Cash Supplies Land

5,900 550 20,000

OWNERS EQUITY C. Clark, Capital 25,000 C. Clark, Drawing (2,000) Fees Earned 7,500 Wages Expense (2,125) Rent Expense (800) Supplies Expense (800) Utilities Expense (450) Misc. Expense (275)

If assets total $300,000 and owners' equity totals $100,000, then total liabilities must be $200,000. A)True B)False

Economic resources owned by an entity are called assets. A)True B)False

The accounting equation can be expressed as: assets equal the sum of liabilities plus owners' equity. A)True B)False