Topic 3: Accounting Process

1. Topic 3: Accounting Process Accounting equation Debit and credit Trial balance

2. 0 1-3 Objective 1 State the accounting equation and define each element of the equation.

3. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

4. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

5. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

6. Example Exercise 1-2 Follow My Example 1-2 0 1-3 John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2007, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts: The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting. • Owner’s equity, as of December 31, 2007. • b. Owner’s equity, as of December 31, 2008, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2008. • A = L + OE • $800,000 = $350,000 + OE • OE = $450,000 • A = L + OE • $130,000 = –$25,000 + OE OE = $155,000 • OE on Dec. 31, 2008: • $605,000 ($450,000 + $155,000) 36

7. 0 1-4 Objective 2 Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.

8. 0 1-4 A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

9. 0 1-4 On November 1, 2007, Chris Clark begins a business that will be known as NetSolutions.

10. Assets Owner’s Equity = Cash 25,000 = a. 0 1-4 Chris Clark, Capital 25,000 Investment by Chris Clark a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions. 40

11. Bal. 5,000 20,000 25,000 0 1-4 Assets Owner’s Equity = Chris Clark, Capital 25,000 Cash + Land 25,000 Bal. = b. –20,000 +20,000 b. NetSolutions exchanged $20,000 for land. 41

12. +1,350 +1,350 c. Bal. 5,000 1,350 20,000 1,350 25,000 0 1-4 Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 5,000 20,000 25,000 c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). 42

13. 0 1-4 Beginning with entry (d) the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide.

14. d. +7,500 Bal. 12,500 1,350 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 5,000 1,350 20,000 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. 44

15. +7,500 d. 1,350 Bal. 25,000 7,500 0 1-4 Liabilities + Owner’s Equity Accounts Chris Clark, Fees Payable Capital + Earned + Bal. 1,350 25,000 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. 45

16. 0 1-4 Expenses The amounts used in earning revenue are called expenses. Adding expenses to the owner’s equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 48, 50, 52, and 54. The bottom row in these four slides provides the balances after each transaction.

17. Bal. 8,850 1,350 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 12,500 1,350 20,000 e. –3,650 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. 47

18. e. –2,125 –800 –450 –275 1,350 25,000 7,500 –2,125 –800 –450 –275 0 1-4 Liabilities +Owner’s Equity Accounts Chris Clark, Fees Wages Rent Utilities Misc. Payable + Capital + Earned Expense Expense Expense Expense 1,350 25,000 7,500 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. 48

19. Bal. 7,900 1,350 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 8,850 1,350 20,000 f. –950 f. NetSolutions paid $950 to creditors during the month. 49

20. f. –950 400 25,000 7,500 –2,125 –800 –450 –275 0 1-4 Liabilities +Owner’s Equity Accounts Chris Clark, Fees Wages Rent Utilities Misc. Payable + Capital + Earned Expense Expense Expense Expense –2,125 –800 –450 –275 1,350 25,000 7,500 f. NetSolutions paid $950 to creditors during the month. 50

21. Bal. 7,900 550 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 7,900 1,350 20,000 g. –800 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. 51

22. g. –800 400 25,000 7,500 –2,125 –800 –800 –450 –275 0 1-4 Liabilities +Owner’s Equity Accounts Chris Clark, Fees Wages Rent Supplies Util. Misc. Payable + Capital + Earned Exp. Exp. Exp. Exp. Exp. 400 25,000 7,500 –2,125 –800 –450 –275 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. 52

23. Bal. 5,900 550 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 7,900 550 20,000 h. –2,000 h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use. 53

24. h. –2,000 400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275 0 1-4 Liabilities +Owner’s Equity Accounts Chris Clark, Chris Clark Fees Wages Rent Supplies Util. Misc. Payable + Capital + Drawing Earned Exp. Exp. Exp. Exp. Exp. 400 25,000 7,500 –2,125 –800 –800 –450 –275 h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use. 54

25. Decreased by Increased by Owner’s withdrawals Expenses Owner’s investments Revenues 0 1-4 Owner’s Equity 55

26. Example Exercise 1-3 0 1-4 Salvo Delivery Service is owned and operated by Joel Salvo. The following selected transactions were completed by Salvo Delivery Service during February: Received cash from owner as additional investment, $35,000. Paid creditors on account, $1,800. Billed customers for delivery services on account, $11,250. Received cash from customers on account, $6,740. Paid cash to owners for personal use, $1,000. 56 Continued

27. Example Exercise 1-3 0 1-4 Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below. (1) Asset (Cash) increases by $35,000; Owner’s Equity (Joel Salvo, Capital) increases by $35,000. 57

28. Follow My Example 1-3 0 1-4 • Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800. • Asset (Accounts Receivable) increases by $11,250; Revenue (Delivery Service Fees) increases by $11,250. • Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by $6,740. • Asset (Cash) decreases by $1,000; Owner’s Equity (Joel Salvo, Drawing) increases by $1,000. 58 For Practice: PE 1-3A, PE 1-3B