1–1McQuaig Bille

11College Accounting10th Edition

McQuaig Bille Nobles

© 2011 Cengage Learning

PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University

Chapter 1Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts

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Assets are properties and other things of value owned and controlled by an economic unit or business entity.

AssetsAssets

Cash Equipment

Copyright

Building Land

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The owner’s right, claim, or financial interest is expressed by the word equity in the business.

Owner’s EquityOwner’s Equity

Another term that could be used is capital.

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Liabilities represents debt. The creditors’ claims to the assets have priority over the claims of the owners.

LiabilitiesLiabilities

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Fundamental Accounting Equation

Fundamental Accounting Equation

An equation expressing the relationship of assets, liabilities, and owner’s equity is called the fundamental accounting equation.

Assets = Liabilities + Owner’s Equity

The total of one side of the fundamental accounting equation must always equal the total of the other side.

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Recording Business Transactions

Recording Business Transactions

J. Conner establishes a sole proprietorship called Conner’s Whitewater Adventure.

Treating the business as independent from its owners, creditors, and customers is called the separate entity concept.

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Transaction (a). Conner deposited $90,000 in a bank account in the name of the business. The account denoted by the owner’s name followed

by the word Capital records the amount of the owner’s investment (or equity) in the business.

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Transaction (b). Conner bought equip-ment, paying cash, $38,000.

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Transaction (c). Company bought equip-ment on account from Signal Products, $4,320.

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Transaction (d). Company paid Signal Products, a creditor, $2,000 on account.

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Transaction (e). Owner invested equip-ment with a fair market (or present) value of $5,200 in the business.

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Summary of TransactionsSummary of Transactions

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Revenue AccountsRevenue Accounts

Revenues are the amounts earned by a business.• Fees earned for performing services• Income from selling merchandise

• Rent income for the use of property

• Interest income for lending money

Revenues may be in the form of cash Revenues may be in the form of cash or credit card receipts.or credit card receipts.

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Expense AccountsExpense Accounts

Expenses are the costs that relate to earning revenue (or the costs of doing business).• Wages expense for labor performed• Rent expense for the use of property• Interest expense for the use of money

• Advertising expense for the use of various media

If a business earns revenue, an If a business earns revenue, an increase in owner’s equity occurs.increase in owner’s equity occurs.When a business incurs or pays When a business incurs or pays

expenses, owner’s equity decreases.expenses, owner’s equity decreases.

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The chart of accounts is the official list of accounts tailor-made for the business.

111 Cash 311113 Accounts Receivable 312117 Prepaid Insurance124 Equipment

411 Income from Tours

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)

J. Conner, CapitalJ. Conner, Drawing

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Transaction (f). Company sold whitewater rafting tours for cash, $8,000.

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Transaction (g). Company paid rent for the month, $1,250.

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Transaction (h). Company bought supplies on credit, $675.

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Transaction (i). Company paid for insurance, $1,875. The company paid for a one-year liability insurance

policy. Because it is paid in advance for a period longer than one month, it has value and is recorded as an asset.

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Steps in Analyzing TransactionsSteps in Analyzing TransactionsSteps in Analyzing TransactionsSteps in Analyzing Transactions

1. Read the transaction to understand what is happening and how it affects the business.

2. Decide on the classifications of the accounts involved.

3. Decide whether the accounts are increased or decreased.

4. After recording the transaction, make sure the accounting equation is in balance.

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Transaction (j). Company receives a bill for an expense, $620.

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Transaction (k). Company sold services on account. Conner’s Whitewater Adventures signs a contract with

Crystal River Lodge to provide 27 one-day rafting tours and bills Crystal River Lodge for $6,750.

The company uses the Accounts Receivable (an asset) account to record amounts due from charge customers.

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Transaction (l). Company paid creditor on account.

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Transaction (m). Company paid an expense in cash, $225.

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Transaction (n). Company paid creditor on account, $620. Recall that this bill had been previously recorded as a

liability in transaction (j).

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Transaction (o). Company paid an expense in cash. Conner’s Whitewater Adventures pays wages of a

part-time employee, $2,360.

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Note that three accounts are involved Note that three accounts are involved in this transaction.in this transaction.

Transaction (p). Company buys equip-ment on account for $3,780, making a cash down payment of $1,850 and charging $1,930.

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Transaction (q). Company receives cash on account from credit customer, $2,500. Conner’s Whitewater Adventures receives $2,500

from Crystal River Lodge to apply against the amount billed in transaction (k).

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Transaction (r). Company sells services for cash, $8,570. Conner’s Whitewater Adventures receives revenue

from cash customers during the rest of the month, $8,570.

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Transaction (s). Owner makes a cash withdrawal, $3,500. Conner withdraws $3,500 from the business for

personal living costs. A withdrawal may be considered the opposite of an

investment in cash by the owner.