Chapter One Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts Edited by Nancy Goehring

Chapter One

Asset, Liability, Owner’s Equity, Revenue, and

Expense Accounts

Edited by Nancy GoehringEdited by Nancy Goehring

Copyright © Houghton Mifflin Company. All rights reserved. 1 - 2

Performance Objectives

1. Define and identify asset, liability, and owner’s equity accounts

2. Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity


Performance Objectives

3. Define and identify revenue and expense accounts

4. Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation


Fundamental Accounting Equation

• A = L + OE

• Assets = Liabilities + Owner’s Equity

Itemsowned

Amountsowed tocreditors

Owner’sinvestment


Performance Objective 1

Define and identify asset, liability, and owner’s equity


Define Asset

• Asset– Cash, properties, and other things of value

owned by an economic unit or business entity


Identify Assets

• Examples of assets:– Cash– Trucks– Buildings– Shoes in a shoe store– Kites in a kite store– Accounts Receivable

• The amount owed to you or the business


Define Accounts Receivable

• Accounts Receivable– An account used or record of the amounts

owed by charge customers (legal claims against charge customers)

• Look for the words:– “Sold on account”


Define Liability

• Liability– Debts or amounts owed to creditors

• In one word:– Debt


Identify Liabilities

• Examples of Debts/Liabilities– Loans (borrowing money)– Accounts Payable account

• Buy goods/services on credit• Receive a bill, but don’t pay until later• Buy supplies from a store, but pay for them

later


Define Accounts Payable

• Accounts Payable– A liability account used for short-term

liabilities or charge accounts, usually due within thirty days

• Look for the words:– “Bought/purchased on account”


Define Owner’s Equity

• The owner’s right to or investment in the business

• A – L = OE


Identify Owner’s Equity

• What is left over for the owner after all the debts have been paid– Remember: Creditors must be paid before

the owners are paid

• The Capital account



• A = L + OE

• Assets = Liabilities + Owner’s Equity– The equals sign means that one side must

always equal the other side– We’ll use this equation later to determine

whether we have recorded our business transactions correctly



Suppose the total value of the assets is $26,000 and the business entity does not owe any amount against the assets.

Assets = Liabilities + Owner’s Equity

$26,000 = $0 + $26,000



Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed $12,000 from the bank.


$23,000 = $12,000 + $11,000


Determine Assets

Mr. Stan’s insurance agency has liabilities of $2,000; his investment (his equity) amounts to $9,000.


? = $2,000 + $9,000


$11,000 = $2,000 + $9,000

$2,000 Liabilities

+ 9,000 Owner’s Equity

= 11,000 Assets


Determine Owner’s Equity

Mr. Stan’s insurance agency has assets of $36,000; his liabilities amount to $5,000.


$36,000 = $5,000 + ?


$36,000 = $5,000 + $31,000

$36,000 Assets

- 5,000 Liabilities

= 31,000 Owner’s Equity


Determine Liabilities

Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $20,000.


$32,000 = ? + $20,000


$32,000 = $12,000 + $20,000

$32,000 Assets

- 20,000 Owner’s Equity

= 12,000 Liabilities



Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity


Recording Business Transactions

We will be recording business transactions for a company with the following details:

Owner’s name: L.P. Arch

Business name: Arch Copy Co.

Business type: Sole Proprietorship(one-person business)


Some Definitions

• Sole proprietorship– A one-owner business

• Separate entity concept– The concept by which a business is treated

as a separate economic or accounting entity

– The business stands by itself, separate from its owners, creditors, and customers


Some Definitions

• Accounts– The categories under the Assets,

Liabilities, and Owner’s Equity headings

• Double-entry accounting– The system by which each business

transaction is recorded in at least two accounts and the accounting equation is kept in balance


Some Definitions

• Fair market value– The present worth of an asset or the amount that

would be received if the asset were sold to an outsider on the open market

• Withdrawal– The taking of cash or other assets out of a

business by the owner for his or her own use (also referred to as drawing)

– Treated as a temporary decrease in owner’s equity


Steps in Recording a Business Transaction

1. What accounts are involved?2. What are the classifications of the

accounts involved?3. Are the accounts increased or

decreased?4. Is the equation in balance after the

transaction has been recorded?Remember: each business transaction

must affect at least two accounts


Transaction (a): Arch deposited $70,000 in a bank account in the name of business.

Assets = Liabilities + Owner's EquityItems owned Amounts owed to creditors Owner's investment

Cash = L. P. Arch, Capital(a) + 70,000 = + 70,000

Recording Transactions (page 10)

Elinor Celuzza

Transactions need to be consistent--tense switches from past to present. Also, the author started out using the bold phrases at the beginning of each paragraph, then switched to paraphrasing the paragraph. One of the problems with this is that the bold phrase is in the past tense, while the paragraph is in the present tense, so the paraphrase gets switched to past tense, which then doesn't match up with the manuscript.



Transaction (b): Bought equipment, paying cash, $33,000.

= Liabilities + Owner's EquityAmounts owed to creditors Owner's investment

Cash + Equip. = L. P. Arch, CapitalPrev. Bal. + 70,000 = + 70,000(b) - 33,000 + 33,000

New Bal. 37,000 + 33,000 = 70,00070,000 = 70,000

AssetsItems owned



Transaction (c): Bought equipment on account from Melton Office Supply, $7,000.

= Liabilities + Owner's Equity

Cash + Equip. = A/P + L. P. Arch, CapitalPrev. Bal. 37,000 + 33,000 = + 70,000(c) + 7,000 + 7,000New Bal. 37,000 + 40,000 = 7,000 + 70,000

=

Assets

77,000 77,000


Transaction (d): Paid Melton Office Supply, a creditor, $2,000.


Cash + Equip. = A/P + L. P. Arch, CapitalPrev. Bal. 37,000 + 40,000 = 7,000 + 70,000(d) - 2,000 - 2,000New Bal. 35,000 + 40,000 = 5,000 + 70,000

=

Assets

75,000 75,000


Elinor Celuzza

The page with Transaction d on it is missing from my manuscript.




Cash + Equip. = A/P +L. P. Arch,

CapitalPrev. Bal. 35,000 + 40,000 = 5,000 + 70,000(e) + 6,200 - 6,200New Bal. 35,000 + 46,200 = 5,000 + 76,200

=

Assets

81,200 81,200

Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200.

+

Elinor Celuzza

Smaller font than other transactions.



Define and identify revenue and expense accounts


Define Revenues (page 13)

• The amounts a business earns

• Examples– Fees earned for performing services– Sales of merchandise– Rent income, and interest income

• May take the form of cash, credit card receipts, or accounts receivable (charge accounts)


Identify Revenue Accounts

• Fees Earned for performing services

• Sales Income from selling merchandise

• Rent Income for the use of property

• Interest Income for lending money

• Credit Sales where cash will be received at a later time– Example: Home Depot sells lumber to a

customer and lets the customer pay later


Define Expenses (page 14)

• The costs that relate to earning revenue (the costs of doing business)

• Examples– Wages– Rent– Interest– Advertising

• May be paid in cash, immediately or at a future time (accounts payable)


Identify Expense Accounts• Wages Expense for labor performed• Rent Expense for the use of property• Interest Expense for the use of money• Advertising Expense• Expenses may be paid in cash when

incurred (immediately) or at a later time• Expense incurred but not paid until later

– Example: Received a bill for a newspaper ad you took out last week

– Cash will be paid at a later time – involves Accounts Payable


Owner’s Equity

• Revenues and expenses are under the umbrella of owner’s equity

• Revenue Add to Capital account

• Expenses Subtract from Capital account


Define Chart of Accounts

The official list of account titles to be used to record the transactions of a business

111 Cash 311 L. P. Arch113 Accounts Receivable 312 L. P. Arch117 Prepaid Insurance

124 Equipment411 Income from Services

221 Accounts Payable 511 Wages Expense512 Rent Expense513 Supplies Expense514 Advertising Expense515 Utilities Expense

Chart of Accounts

Expenses (500s)

Assets (100s)

Liabilities (200s)

Owner's Equity (300s)

Revenues (400s)

, Drawing



Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation


Transaction (f): Arch Copy Co. sold services for cash, $2,520.

= Liabilities +

Cash + Equip. = A/P + L. P. Arch, Capital + RevenuePrev. Bal. 35,000 + 46,200 = 5,000 + 76,200(f) + 2,520 + 2,520

(Income from Services)New Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520

=83,720 83,720

Assets Owner's Equity



Transaction (g): Paid rent for the month, $700.

= Liabilities +

Cash + Equip. = A/P + L. P. Arch, Capital + Revenue + ExpensesPrev. Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520(g) - 700 + 700

(Rent Expense)New Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 - 700

=83,020 83,020



+


Transaction (h): Arch Copy Co. bought supplies (toner and paper) on credit. These supplies are used

immediately; therefore, they are recorded as an expense. (New IRS regulations as of 2005.)

= Liabilities +

Cash + Equip. = A/P + L. P. Arch, Capital + Revenue + ExpensesPrev. Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 + 700(h) + 600 + 600

(Supplies Expense)

New Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300=83,020 83,020




Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy.

(If the insurance is paid in advance for a period longer than one month, it has value and is therefore recorded as an asset.)

= Liabilities +

Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300(I) - 360 +360

New Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300= 83,020

Assets

83,020

Owner's Equity


Elinor Celuzza

Should the abbreviations match the manuscript exactly? (Ppd. Ins. in ms.)


Transaction (j): Arch Copy Co. received a bill for an expense.

= Liabilities +

Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300(j) + 200 + 200

(Advertising Expense)

New Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500= 83,02083,020




Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services

performed.

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500(k) + 1,050 + 1,050

(Income from Services)

New Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500=84,070 84,070




Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500(l) - 1,800 - 1,800

New Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500=82,270 82,270




Transaction (m): Arch Copy Co. received and paid a bill from Regional Power Inc. for $160.


= Liabilities +Amounts owed to creditors

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500(m) - 160 + 160

(Utilities Expense)

New Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660=82,100 82,110

Assets Owner's EquityItems owned Owner's investment


Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising.

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660(n) - 200 - 200

New Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660=81,910 81,910



Elinor Celuzza

Stopped changing transaction tense here.


Transaction (o): Arch Copy Co. pays wages for a part-time employee, $2,130.

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660(o) - 2,130 + 2,130

(Wages Expense)

New Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790=79,780 79,780




Transaction (p): Arch Copy Co. buys additional equipment from Melton Office Supply for $3,520, paying

$620 down, with the remaining $2,900 on account

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790(p) - 620 + 3,520 + 2,900

New Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790=82,680 82,680




Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer.

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790(q) + 850 - 850

New Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790=82,680 82,680




Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4,220

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790(r) + 4,220 + 4,220

(Income from Services)

New Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790=86,900 86,900




Transaction (s): Arch withdraws $2,500 in cash from the business for her personal living costs

= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790(s) - 2,500 -2,500

(Drawing)

New Bal. 34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 - 3,790=84,400 84,400




= Liabilities +

Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue -34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 -

=

34,120 6,70049,720 73,700

360 7,790200 3,790


Left Side Equals Sign Right Side Equals Sign

CashAccts. Rec.Ppd. Ins.Equip.

A/PL. P. Arch, CapitalRevenueExpenses

Recording Transactions

Expenses 3790

_______


Demonstration Problem

• We will be recording business transactions for a company with the following details:

Owner name: James Kirk

Business name: James Kirk, CPA

Business type: Sole proprietorship

(one-person business)





(a) Deposited $13,500 in a bank account in the name of the business



(b) Paid rent for the month, $1,600 (Rent Expense)



(c) Bought equipment, including a computer and a printer, for $9,500 from Bingham Company. Paid $6,700

in cash, with the balance due in thirty days.



(d) Purchased office supplies and announcements for $970 from City Stationers.

Payment is due in 30 days.



(e) Billed clients $5,500 for services rendered (Client Fees).



(f) Paid $1,450 salary to secretary/assistant for the month.



(g) Paid telephone bill of $210 (Telephone Expense).



(h) Received cash from clients previously billed on account, $2,450.



(i) Paid Bingham Company $970 on account.



(j) Paid $275 for continuing education course (Miscellaneous Expense)



(k) Kirk withdrew $2,200 for personal use.


Demonstrate that the total of one side of the equation equals the total of the other side of the equation.


In-class and Homework Assignments

Documents

Chapter One Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts Edited by Nancy Goehring