Analyzing Transactions: The Accounting Equation

Assets Examples

-Cash -Merchandise -Furniture -Fixtures -Machinery -Buildings -Land -Accounts Receivables -Vehicles

Revenues examples

-Funeral service sales -Consulting fees -Rent revenue (if the business rents space to others) -Interest Revenue (for interest earned on bank deposits) -Sales (for sales or merchandise)

Processing

-Identify accounts -Classify accounts -Determine whether increase or decrease -Enter transaction and verify balance

Expenses examples

-Rent -Salaries -Supplies consumed -Taxes

Analyzing business transactions

3 questions: 1. What happened? (Make certain you understand the event that has taken place). 2. Which accounts are affected? (Identify the accounts that are affected. Classify these accounts as assets, liabilities, or owner's equity). 3. How is the accounting equation affected? (Determines which accounts have increased or decreased, make certain that the accounting equation remains in balance after the transaction has been entered.

Owner's equity transactions

4 types have the following effect on owners's equity: Decrease: Expenses, Drawing Increase: Revenues, Investments

Accounting period concept

Concert that income determination can be made on a periodic basis (month, quarter, year, etc.) Any accounting period of 12 months is called a fiscal year.

Balance Sheet

Confirms the accounting equation has remained in balance. Also referred to as a statement of financial position or statement of financial condition.

Liabilities

Items owed. A probable future outflow of assents as a result of a past transaction. Debts or obligations of the business that be paid with cash, goods or services.

Assets

Items owned by a business that will provide future benefits. *Can't be rented but doesn't have to be paid off, could still be making payments on it.

Owners equity

Or Proprietorship Amount by which the business assets exceed liabilities. Also called Net Worth or Capital

Revenues

Or sales The amount a business charges customers for products sold or services performed. Recognized when earned (even if cash as not yet been received). Increases both assets (cash or accounts receivable) and owner's equity.

Output

Recording the processed information on financial statements

Statement of Owner's Equity

Reports the activities that affected owner's equity for a specific period of time. Uses Net Income from the income statement

Income statement

Reports the profitability of business operations for a specific period of time. Expenses are subtracted from revenues to determine net income/loss Also called the profit and loss statement or operating statement

Expenses

Represent the decrease in assets (or increase in liabilities) as a result of efforts made to produce revenues. Separate accounts maintained for each type of expense. Either decrease assets or increase liabilities, but ALWAYS decrease owner's equity.

Net Income

Revenue greater than expenses Revenue: $6,000 - Expenses: $5,000 = $1,000

Business Entity Concept

The owner of a business may have business assets and liabilities as well as non business assets and liabilities. Nonbusiness (PERSONAL) assets and liabilities are not included in the entity's accounting records. If the owner inverts money or other assets in the business, the item is now classified as a business asset.

Withdrawals

The owner taking (withdrawing) cash or other assets from the business for personal use. Reduces owner's equity and assets Also referred to as drawings

Accounts Receivable (A/R)

The total amount of money owed to the business by its customers as a result of making sales "on account" or "on credit" Simply, customers who have promised to pay sometime in the future.

Accounting Process

Three basic phases 1. Input 2. Processing 3. Output

Financial statements

Three commonly prepared: 1. Income statement 2. Statement of owner's equity 3. Balance sheet

Input

Transactions provide the necessary input

Liabilities Examples

accounts payable, notes payable, Mortgage payable

Net Loss

expenses are greater than revenue Revenue: $8,000 - Expenses: $9,500 = ($1,500)

Notes payable

A formal written promises to pay suppliers or lenders specified sums of money at a definite future time.

Account

A separate record used to summarize changes in each asset, liability, and owner's equity of a business. Ex: cash, accounts payable, etc.

Business transaction

An economic event that has a direct impact on the business. Usually requires an exchange with an outside entity, measured in dollars. All business transactions affect the accounting equation through specific accounts (at least two)

Business entity

An individual, association, or organization that engages in economic activities and controls specific economic resources. -Finances are kept seperste from the owner's nonbusiness assests and liabilities (business entity concept).

Accounts payable

An unwritten promise to pay a supplier for assets purchased or services rendered. Referred to as making a purchase "on account" or "on credit"

Owners equity formula

Assets - Liabilities= Owner's equity

Accounting Equation

Assets = Liabilities + Owner's Equity

Owners equity example

If a business has total assets of $100,000 and total liabilities of $60,000, what is the owners equity?? $40,000 Once the debt is paid the remaining assets belong to the owner (owner's equity)