Chapter 2Determine How Transactions

Change the Accounting Equation

Accounting Categories

• Accounting is organized into Categories – The 5 categories we will use this semester are:1. Assets—what the company owns2. Liabilities—what the company owes3. Owner’s Equity —the owner’s financial right to

the company4. Revenue—money coming in from the operation of

the business5. Expenses—money paid out from the operation of

the business

Accounts

• Each category contains accounts which are individual records of a single item.– Categories and accounts used in Chapter 2 & 3:1. Assets—Cash, Prepaid Insurance, Supplies2. Liabilities—Biggler Company, Accounts Payable3. Owner’s Equity —John Smith, Capital (Investment) John

Smith, Drawing (Withdrawals)4. Revenue—Sales, Fees5. Expenses—Advertising Expense, Miscellaneous Expense,

Rent Expense, Repair Expense, Utilities Expense

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 EQUITYOr more simply put: A=L+OE

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

ASSETS =A change to one Assets =

+ Increase Cash

- Decrease Cash

A change to two Assets =+ Increase Supplies- Decrease Cash

Liabilities + Owner’s EquityA change to either a Liability or to Owner’s Equity

+ Increase Capital

- Decrease Accts. Pay. (Liability)

No change

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

ASSETS =

+ Cash $10,000

Liabilities + Owner’s Equity

+ Capital $10,000

Transactions Sample: Paid cash for supplies $200

ASSETS =

- Cash $200+ Supplies $200

Liabilities + Owner’s Equity

Transactions Sample: Paid cash for insurance $500

ASSETS =

- Cash $500+ Prepaid Insurance $500

Liabilities + Owner’s Equity

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

ASSETS =

+Supplies $300

Liabilities + Owner’s Equity

+ Biggler Co. $300

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

ASSETS =

- Cash $100

Liabilities + Owner’s Equity

- Biggler Co. $100

Balance Sheet

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

Smith Delevery Service

Balance Sheet

September 5, 2012

Assets Liabilities

Cash 5 0 0 0

Biggler Supply 1 0 0 0

Prepaid Insurance 1 6 0 0 Owner's Equity

Supplies 1 4 0 0 John Smith, Capital 7 0 0 0

Total Assets 8 0 0 0 Total Liab. + Ow. Eq. 8 0 0 0