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LESSON 1-2

LESSON 1-2. How Business Activities Change the Accounting Equation. Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School. Business activities change the amounts in the accounting equation.

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LESSON 1-2

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  1. LESSON 1-2 How Business Activities Change the Accounting Equation Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

  2. Business activities change the amounts in the accounting equation. Transaction – a business activity that changes assets, liabilities, or owner’s equity Unit of Measurement – business transactions are stated in numbers that have common values What are Business Activities? LESSON 1-2

  3. ASSETS Cash Supplies Accounts Receivable Prepaid Insurance Buildings Equipment LIABILITIES Accounts Payable (A/P) Mortgage Payable Notes Payable (N/P) OWNER’S EQUITY (O/E) Capital REVIEW OF TYPES OF ACCOUNTS LESSON 1-2

  4. About Accounts • Account – a record summarizing all the information pertaining to a single item in the accounting equation • Account Title – the name given to an account • Account Balance – the amount in an account • Capital – the account used to summarize the owner’s equity in a business LESSON 1-2

  5. The Accounting Equation You must always keep the accounting equation in balance. • ASSETS = LIABILITIES + OWNERS EQUITY LESSON 1-2

  6. RECEIVING CASH FROM THE OWNER Analyze the transaction: What accounts will the transaction affect? • We are receiving cash which is an asset. It is increasing. • The owner is investing in the business so they are increasing their equity (owners equity) in the business. LESSON 1-2

  7. Transaction 1August 1. Received cash from owner as an investment, $5,000.00. RECEIVING CASH page 10 LESSON 1-2

  8. PAYING CASH FOR SUPPLIES Analyze the transaction: What accounts will the transaction affect? • We are paying cash which is an asset. It is decreasing. • We are buying supplies which are assets. Our supplies are increasing. LESSON 1-2

  9. Transaction 2August 3. Paid cash for supplies, $275.00. PAYING CASH page 11 Transaction 3August 4. Paid cash for insurance, $1,200.00. LESSON 1-2

  10. LIABILITY ACCOUNT: ACCOUNTS PAYABLE • It is a common business practice to buy items and pay for them at a future date. • Another way to state this activity is to say that these items are bought onaccount. • Since we now owe money to a vendor we have incurred a liability we call Accounts Payable. • When we pay the vendor we will be decreasing the amount of money we owe and our liability will decrease. LESSON 1-2

  11. Transaction 4 August 7. Bought supplies on account from Supply Depot, $500.00. TRANSACTIONS ON ACCOUNT page 12 Transaction 5 August 11. Paid cash on account to Supply Depot, $300.00. LESSON 1-2

  12. TRANSACTIONS ON ACCOUNT Analyze the transaction: What accounts will the transaction affect? • We are buying supplies which is an asset. It is increasing. • We now owe money (A/P) to our supply vendor which is a liability. Our accounts payable is increasing. LESSON 1-2

  13. TERMS REVIEW page 13 • transaction • account • account title • account balance • capital LESSON 1-2

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