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The Accounting Equation
[ Assets ] = [ Liabilities + Owner's Equity]
Left side shows the assets.
- Right side shows where the money came from to buy the assets.
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Business Transaction
- Economic event that has a direct impact on the business.
- Usually requires an exchange with an outside entity.
- We must be able to measure this exchange in dollars.
- All business transactions affect the accounting equation through specific accounts.
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Account
A separate record used to summarize changes in each asset, liability, and owner's equity of a business.
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Owner's Equity Transactions
Four Types:
Decrease: Increase:
- Expenses Revenues
- Drawing Investments
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Revenues
- The amount a business charges customers for products sold or services performed.
- Recognized when earned (even if cash has not been received yet)
- Increases both assets (cash or accounts receivable) and owner's equity.
- Examples:
- Delivery Fees, Consulting Fees, Rent Revenue (if the business rents space to others), Interest Revenue (for interest earned on bank deposits), Sales (for sales of merchandise).
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Expenses
- Represent the decrease in assets (or increase in liabilities) as a result of efforts made to produce revenues.
- Separate accounts are maintained for each type of expense.
- Either decrease assets or increase liabilities, but ALWAYS decrease owner's equity.
- Examples:
- Rent, Salaries, Supplies consumed, Taxes
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Net Income
REVENUE > than EXPENSES= NET INCOME
Example: Luke P performed $6,000 of tax services (revenue) this year and incurred expenses of $1,500 for rent, $500 for supplies, and $3,000 in salaries.
Revenue - Expenses = Net Income
$6,000 - $5,000 = $1,000
$1,500 + $500 + $3,000 = $5,000
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Accounting Period Concept
- The concept 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
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Withdrawals
- The owner taking [withdrawing] cash or other assets from the business for personal use
- Reduces owner's equity assets
- Also referred to as drawing
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Financial Statements
Three commonly prepared financial statements:
- 1. Income Statement
- 2. Statement of owner's equity
- 3. Balance Sheet
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Income Statement
-Reports the prfitability 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.
Revenue - Expense = Net Income/Loss
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Financial Statement Headings
- 1st Line: The name of the company
- 2nd Line: The title of the statement
- 3rd Line: The time period covered or the date of the statement
- Example:
- Jessie J Campus Delivery
- Income Statement
- For Month Ended June 30, 20--
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The Statement Of Owner's Equity
- Reports the activities that affected owner's equity for a specific period of time
- Uses Net Income from the oncome statement
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Balance Sheet
-Confirms the accounting equation has remained in balance
-Also referred to as a statement of financial position or statement of financial condition
- Reports assets, liabilities, and owner's equity on a SPECIFIC DATE, not a period of time.
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Accounting Process
Three Basic Phases
- [Input] --> [Processing] --> [Output]
- Transactions provide the neccesary input
- Identify Accounts
- Classify Accounts
- Determine Wether Increase or Decrease
- Enter transaction and verify balance
- Income Statement
- Revenues - Expenses = Net Income
- Statement Of Owner's Equity
- Beginning Capital + Investements + Net Income - Withdrawals = Ending Capital
- Balance Sheet
- Assets = Liabilities + Owners Equity
- [Ending Captital]
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