Chapter 2
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Chapter 2. Determine How Transactions Change the Accounting Equation. Accounting Categories. Accounting is organized into Categories The 5 categories we will use this semester are: Assets —what the company owns Liabilities —what the company owes

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Chapter 2

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Chapter 2

Chapter 2

Determine How Transactions Change the Accounting Equation


Accounting categories

Accounting Categories

  • Accounting is organized into Categories

    • The 5 categories we will use this semester are:

    • Assets—what the company owns

    • Liabilities—what the company owes

    • Owner’s Equity —the owner’s financial right to the company

    • Revenue—money coming in from the operation of the business

    • Expenses—money paid out from the operation of the business


Accounts

Accounts

  • Each category contains accounts which are individual records of a single item.

    • Categories and accounts used in Chapter 2 & 3:

    • Assets—Cash, Prepaid Insurance, Supplies

    • Liabilities—Biggler Company, Accounts Payable

    • Owner’s Equity —John Smith, Capital (Investment) John Smith, Drawing (Withdrawals)

    • Revenue—Sales, Fees

    • Expenses—Advertising Expense, Miscellaneous Expense, Rent Expense, Repair Expense, Utilities Expense


The accounting equation

The Accounting Equation

  • The relationship between Assest, Liabilities, and Owner’s Equity is written as an equation

    • Serves as the basis for all accounting organization

      • Is the root of all concepts we will learn

        TOTAL ASSETS = TOTAL LIABILITIES + TOTAL OWNER’S EQUITY

        Or more simply put: A=L+OE


Transactions

Transactions

  • A business activity that changes the amounts in the accounting equation A=L+OE

  • Transactions are stated in numbers that have a common value (Concept: Unit of Measurement).

    • In the United States, business transactions are recorded in dollars $ and cents


  • How transactions change the accounting equation

    How Transactions Change The Accounting Equation

    ASSETS =

    Liabilities + Owner’s Equity

    A change to either a Liability or to Owner’s Equity

    Increase Capital

    Decrease Accts. Pay. (Liability)

    No change

    A change to one Assets =

    • Increase Cash

    • Decrease Cash

      A change to two Assets =

    • Increase Supplies

    • Decrease Cash


    Transactions sample received cash from the owner as an investment 10 000

    Transactions Sample: Received cash from the owner as an investment $10,000

    ASSETS =

    Liabilities + Owner’s Equity

    + Capital $10,000

    + Cash $10,000


    Transactions sample paid cash for supplies 200

    Transactions Sample: Paid cash for supplies $200

    ASSETS =

    Liabilities + Owner’s Equity

    • Cash $200

      + Supplies $200


    Transactions sample paid cash for insurance 500

    Transactions Sample: Paid cash for insurance $500

    ASSETS =

    Liabilities + Owner’s Equity

    • Cash $500

      + Prepaid Insurance $500


    Transactions sample bought supplies on account from biggler company 300

    Transactions Sample: Bought supplies on account from Biggler Company $300

    ASSETS =

    Liabilities + Owner’s Equity

    + Biggler Co.

    $300

    +Supplies $300


    Transactions sample paid cash on account to biggler co for amount owed 100

    Transactions Sample: Paid cash on account to Biggler Co. for amount owed $100

    ASSETS =

    Liabilities + Owner’s Equity

    - Biggler Co.

    $100

    - Cash $100


    Balance sheet

    Balance Sheet

    • A financial statement prepared on a specific date used to report details about a company’s Assets, Liabilities, and Owner’s Equity


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