a formal report of a business's financial condition on a certain date; reports the assets, liabilities, and owner's equity of the business
Define:
break even
a point at which revenue equals expenses
Define:
business transaction
a financial event that changes the resources of a firm
Define:
capital
financial investment in a business equity
Define:
equity
an owner's financial interest in a business
Define:
expense
an outflow of cash, use of other assets, or incurring a liability
Define:
fair market value
the current worth of an asset or the price the asset would bring if sold on the open market
Define:
fundamental accounting equation
the relationship between assets and liabilities plus owner's equity
property = financial interest
Define:
income statement
a formal report of business operations covering a specific period of time
also called a profit loss statement or a statement of income and expenses
Define:
liabilities
debts or obligations of a business
Define:
net income
the result of an excess of revenue over expenses
Define:
net loss
the result of an excess of expenses over revenue
Define:
on account
an arrangement to allow payment at a later date
also called a charge account or open-account credit
Define:
owner's equity
the financial interest of the owner of a business
also called proprietorship or net worth
Define:
revenue
an inflow of money or other assets that results from the sales of goods or services or from the use of money or property
also called income
Define:
statement of owner's equity
a formal report of changes that occurred in the owner's financial interest during a reporting period
Define:
withdrawals
funds taken from the business by the owner for personal use
What does the accounting process start with?
the analysis of business transactions
What are some examples of business transactions?
purchases, sales, payments, and receipts of cash
What are the steps used to analyze the effect of a business transaction?
1. Describe the financial event: a) identify the property; b) identify who owns the property; c) determine the amount of increase or decrease
2. Make sure the equation is in balance
Carolyn Wells withdrew $100,000 from personal savings and deposited it in a new checking account in the name of Wells’ Consulting Services.
Name the accounts effected and how it fits into the equation.
ANALYSIS
a. The business received $100,000 of property in the form of cash.
a. Wells had a $100,000 financial interest in the business.
Wells’ Consulting Services issued a $5,000 check to purchase a computer and other equipment.
Name the accounts effected and how it fits into the equation.
ANALYSIS
b. The firm purchased new property (equipment) for $5,000.
b. The firm paid out $5,000 in cash.
Wells’ Consulting Services purchased office equipment on account from Office Plus for $6,000.
Name the accounts effected and how it fits into the equation.
ANALYSIS
c. The firm purchased new property (equipment) that cost $6,000.
c. The firm owes $6,000 to Office Plus.
What are two financial interest or claims against a business's property?
creditor's claim (Accounts Payable)
owner's claim (Capital)
Wells’ Consulting Services issued a check for $1,500 to Office Delux, Inc., to purchase office supplies.
Name the accounts effected and how it fits into the equation.
ANALYSIS
d. The firm purchased office supplies that cost $1,500.
d. The firm paid $1,500 in cash.
Wells’ Consulting Services issued a check for $2,500 to Office Plus.
Name the accounts effected and how it fits into the equation.
ANALYSIS
e. The firm paid $2,500 in cash.
e. The claim of Office Plus against the firm decreased by $2,500.
Wells’ Consulting Services issued a check for $8,000 to pay for rent for the months of December and January.
Name the accounts effected and how it fits into the equation.
ANALYSIS
f. The firm prepaid the rent for the next two months in the amount of $8,000.
f. The firm decreased its cash balance by $8,000.
Example of a Balance Sheet
List the following on the correct side of the equation and determine if they are an asset, liability, or equity.
cash; supplies; prepaid rent; equipment; accounts payable; capital
Describe a transaction that increases an asset and the owner's equity.
the initial investment of cash in a business by the owner
Teresa Wells purchased a computer for $3,250 on account for her business. What is the effect of this transaction?
A. Equipment is increased by $3,250 and accounts payable is increased by $3,250.
John Amos began a new business by depositing $75,000 in the business bank account. He wrote two checks from the business account: $12,000 for office furniture and $4,000 for office supplies. What is his financial interest in the company?
A. $75,000
Specialty Import Co. has no liabilities. The asset and owner's equity balances are as follows. What is the balance of “Supplies”?
Cash $25,000
Office Equipment $15,000
Supplies ???
Jason Odgen, Capital $50,000
$10,000
What increases owner's equity?
revenue
What decreases owner's equity?
expenses
During the month of December, Wells' Consulting Services earned a total of $36,000 in revenue from clients who paid cash for accounting and bookkeeping services.
Name the accounts effected and how it fits into the equation.
ANALYSIS
g. The firm received $36,000 in cash for services provided to clients.
g. Revenues increased by $36,000, which results in a $36,000 increase in owner’s equity.
T or F:
Revenue amounts are recorded in a separate column under owner's equity.
True
During December, Wells' Consulting Services earned $11,000 of revenue from charge account clients.
Name the accounts effected and how it fits into the equation.
ANALYSIS
h. The firm acquired a new asset, accounts receivable, of $11,000.
h. Revenues increased by $11,000, which results in an $11,000 increase in owner’s equity.
During December, Wells' Consulting Services received $6,000 on account from clients who owed money for services previously billed.
Name the accounts effected and how it fits into the equation.
ANALYSIS
i. The firm received $6,000 in cash.
i. Accounts receivable decreased by $6,000.
In December, Wells’ Consulting Services paid $8,000 in salaries for the accounting clerk and Carlos Valdez.
Name the accounts effected and how it fits into the equation.
ANALYSIS
j. The firm decreased its cash balance by $8,000.
j. The firm paid salaries expense in the amount of $8,000, which decreased owner’s equity.
T or F:
Expenses are recorded in a separate column under owner's equity.
True
Wells’ Consulting Services issued a check for $650 to pay the utilities bill.
Name the accounts effected and how it fits into the equation.
ANALYSIS
k. The firm decreased its cash balance by $650.
k. The firm paid utilities expense of $650, which decreased owner’s equity.
T or F:
Withdrawals are a business expense.
False; Withdrawals are not a business expense but a decrease in the owner's equity.
Carolyn Wells wrote a check to withdraw $5,000 cash for personal use.
Name the accounts effected and how it fits into the equation.
ANALYSIS
l. The firm decreased its cash balance by $5,000.
l. Owner’s equity decreased by $5,000.
What does the three-line heading of the income statement show?
who - the business name appears on the first line
what - the report title appears on the second line
when - the period covered appears on the third line
Example of Income Statement
What are some accounts listed on an Income Statement?
Revenue - Fees Income
Expenses - Salaries Expense, Utilities Expense
Net Income
T or F:
On an Income Statement, the Revenue and Expenses are added to give the Net Income.
False; the Expenses is subtracted from the Revenue to give the Net Income
Give some examples of how time periods are reported on the Income Statement Heading.
T or F:
On each of the Financial Statements, a double line is used to show that the amounts above it are being added or subtracted; and a single line is used under the final amount in a column or section of a report to show that the amount is complete.
False; On each of the Financial Statements, a single line is used to show that the amounts above it are being added or subtracted; and a double line is used under the final amount in a column or section of a report to show that the amount is complete.
T or F:
On an Income Statement, nothing is added to or subtracted from an account with a double line.
True
What does the three-line heading of the Statement of Owner's Equity show?
who - the business name appears on the first line
what - the report title appears on the second line
when - the period covered appears on the third line
What is the order of accounts on the Statement of Owner's Equity?
Capital, beginning of period
Capital, end of period
Increase/Decrease in Capital
Add/Less Withdrawals for period
Net Income for period
What does the Balance Sheet show?
assets - the types and amounts of property that the business owns
liabilities - the amounts owed to creditors
owner's equity - the owner's equity on the reporting date
What does the three-line heading of the income statement show?
who - the business name appears on the first line
what - the report title appears on the second line
when - the date of the report appears on the third line
Describe how a Balance Sheet is constructed. List Assets, Liabilities, and Owner's Equity.
What is the order in which the Financial Statements are prepared?
income statement, statement of owner's equity, balance sheet
What amount is transferred from the Income Statement to the Statement of Owner's Equity?
Net Income/Loss
What amount is transferred from the Statement of Owner's Equity to the Balance Sheet?
ending Capital
If an owner gives personal tools to the business, how is the transaction recorded?
as an additional investment by the owner recorded on the basis of fair market value
What information is contained in the income statement?
D. revenue and expenses for a period of time
Interior Designs has assets of $90,000 and liabilities of $35,000. What is the owner's equity?
C. $55,000
Haden Hardware had revenues of $55,000 and expenses of $26,000. How does this affect owner's equity?
$29,000 increase
If one side of the fundamental accounting equation is decreased, what will happen to the other side? Why?
The opposite side of the accounting equation will decrease because a decrease in assets results in a corresponding decrease in either a liability or the owner's equity.
What is the difference between buying for cash and buying on account?
Buying for cash results in an immediate decrease in cash; buying on account results in a liability recorded as accounts payable.
In what order are the financial statements prepared? Why?
The income statement is prepared first because the net income or loss is needed to complete the statement of owner's equity. The statement of owner's equity is prepared next to update the change in owner's equity. The balance sheet is prepared last.
What effect do revenue and expenses have on owner's equity?
