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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

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