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ACCOUNTING I Chapter 1
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WHAT IS ACCOUNTING?
Accounting – planning, recording, analyzing, and interpreting financial information
Accounting System – A planned process for providing financial information that will be useful to management
Accounting Records – Organized summaries of a business’s financial activities
Financial Statements – Financial reports that summarize the financial condition and operations of a business
Service Business – a business that performs an activity for a fee
Proprietorship – a business owned by one person
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THE PROPRIETORSHIP
Advantages
Ease of formation
Total Control by the owner
Profits that are not shared
Disadvantages
Limited resources
Unlimited liability
Limited expertise
Limited life
Obligation to follow the laws of both the federal government and the state and city in which the business is formed
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THE ACCOUNTING EQUATION Assets = Liabilities + Owner’s Equity
Left side amounts
Right side amounts
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THE ACCOUNTING EQUATION Asset – Anything of value that is owned
Equities – Financial rights to the assets of a business1. Equity of those to whom money is owed2. Equity of the owner
Liability – An amount owed by a business
Owner’s Equity – The amount remaining after the value of all liabilities is subtracted from the value of all assets
Accounting Equation – An equation showing the relationship among assets, liabilities, and owner’s equity (Before a business starts, its accounting equation would show all zeros.)
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WORK TOGETHER 1-1
Completing the accounting equation
Write the answers to the following problem in the Working Papers. We will go through this first example together.
1. For each line, fill in the missing amount to complete the accounting equation.
Assets = Liabilities + Owner’s Equity
? 3,000 8,000
10,000 ? 6,000
63,000 35,000 ?
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ON YOUR OWN 1-1
Completing the accounting equation
Write the answers to the following problem in the Working Papers.
1. For each line, fill in the missing amount to complete the accounting equation.
Assets = Liabilities + Owner’s Equity
30,000 ? 13,000
? 60,000 20,000
51,000 25,000 ?
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APPLICATION PROBLEM 1-1
Pg. 19 in textbook – complete in your Working Papers
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1-2 RECEIVING CASH
Transaction – A business activity that changes assets, liabilities, or owner’s equity
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 ( an owner’s equity account)
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RECEIVING CASH
Assets = Liabilities + Owner’s Equity
Cash Kim Park, Capital
$0 $0 $0
+5,000 +5,000
$5,000 $0 $5,000
Transaction 1 – August 1. Received cash from owner as an investment, $5,000.00
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PAYING CASH
Assets = Liabilities + Owner’s Equity
Cash + Supplies +
Prepaid = Insurance
Kim Park, Capital
$5,000-275
$0+275
$0 $0 $5,000
$4,725-1,200
$275 $0+1,200
+5,000
$3,525 $275 $1,200 $0 $5,000
Transaction 2 – August 3. Paid cash for supplies, $275.00Transaction 3 – August 4. Paid cash for insurance, $1,200.00
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TRANSACTIONS ON ACCOUNT Transaction #4: August 7. Bought supplies on account from Supply Depot, $500.00
Transaction #5: August 11. Paid cash on account to Supply Depot, $300.00
Assets = Liabilities + Owner’s Equity
Cash + Supplies +
Prepaid = Insurance
Accts. Pay. – Supply Depot
Kim Park, Capital
$3,525 $275+500
$1,200 $0+500
$5,000
$3,525-300
$775 $1,200 $500-300
$5,000
$3,225 $775 $1,200 $200 $5,000
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WORK TOGETHER 1-2 Determining how transactions change an accounting equation
Write the answers to the following problem in the Working Papers. We will go through this example together.
1. For each transaction, place a (+) in the appropriate column if the classification is increased. Place a minus (-) in the appropriate column if the classification is decreased.
Transactions:
1. Bought supplies on account
2. Received cash from owner as an investment
3. Paid cash for insurance
4. Paid cash on account
Trans. No.
Assets =
Liabilities +
Owner’s Equity
1.
2.
3.
4.
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ON YOUR OWN1-2 Determining how transactions change an accounting equation
Write the answers to the following problem in the Working Papers. We will go through this example together.
1. For each transaction, place a (+) in the appropriate column if the classification is increased. Place a minus (-) in the appropriate column if the classification is decreased.
Transactions:
1. Received cash from owner as an investment
2. Bought supplies on account
3. Paid cash for supplies
4. Paid cash for insurance
5. Paid cash on account
Trans. No.
Assets =
Liabilities +
Owner’s Equity
1.
2.
3.
4.
5.
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APPLICATION PROBLEM 1-2
Pg. 19 in Text book, complete in your Working Papers
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1-3 REVENUE TRANSACTIONS Revenue – An increase in owner’s equity resulting from the operation of a business Transaction #6 – August 12. Received cash from sales, $295.00
Sale on Account – A sale for which cash will be received at a later date Transaction #7 – August 12. Sold services on account to Oakdale school, $350.00
Assets = Liabilities + Owner’s Equity
Cash + Accts. Rec. + Oakdale School
Supplies + Prepaid = Insurance
Accts. Pay. +Supply Depot
Kim Park, Capital
$3,525+295
$0 $775 $1,200 $200 $5,000+295 (revenue)
$3,520 $0+350
$775 $1,220 $200 $5,295+350 (revenue)
$3,520 $350 $775 $1,200 $200 $5,645Total of Left Side: $3520 + $350 +$775 + $1200 = $5,845
Total of Right Side: $200 + $5645 = $5,845
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EXPENSE TRANSACTIONS Expense – A decrease in owner’s equity resulting from the operation of a business Transaction #8 – August 12. Paid cash for rent, $300.00 Transaction #9 – August 12. Paid cash for telephone bill, $40.00
Assets = Liabilities + Owner’s Equity
Cash + Accts. Rec. + Oakdale School
Supplies + Prepaid = Insurance
Accts. Pay. +Supply Depot
Kim Park, Capital
$3,520-300
$350 $775 $1,200 $200 $5,645-300 (expense)
$3,220-40
$350 $775 $1,220 $200 $5,345-40 (expense)
$3,180 $350 $775 $1,200 $200 $5,305
Total of Left Side: $3180 + $350 + $775 + $1200 = $5,505
Total of Right Side: $200 + $5305 = $5,505
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OTHER CASH TRANSACTIONS Received Cash on Account Transaction #10 – August 18. Received cash on account from Oakdale School, $200.00
Withdrawal – Assets taken out of a business for the owner’s personal use Transaction #11 – August 18. Paid cash to owner for personal use, $125.00Assets = Liabilities + Owner’s
Equity
Cash + Accts. Rec. + Oakdale School
Supplies + Prepaid = Insurance
Accts. Pay. +Supply Depot
Kim Park, Capital
$3,180+200
$350-200
$775 $1,200 $200 $5,305
$3380-125
$150 $775 $1,220 $200 $5305-125 (withdrawal)
$3255 $150 $775 $1,200 $200 $5180Total of Left Side: $3255 + $150 + $775 + $1200 = $5,380
Total of Right Side: $200 + $5180 = $5,380
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WORK TOGETHER 1-3 Write the answers to the following problem in the Working Papers. We will go through this first example together.
Place a plus (+) in the appropriate column if the account is increased. Place a minus (-) in the appropriate column if the account is decreased.
Transactions:
1. Received cash from sales
2. Sold services on account to Bowman Company
3. Paid cash for telephone bill
4. Received cash on account from Bowman Company.
5. Paid cash to owner for personal use.
Trans. No.
Assets
= Liabilities +
Owner’s Equity
Cash + Accts. Rec + Bowman Co.
Supplies +
Prepaid = Insurance
Accts. Pay – Maxwell Co.
Susan Sanders, Capital
1.
2.
3.
4.
5.
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ON YOUR OWN1-3 Write the answers to the following problem in the Working Papers. We will go through this first example together.
Place a plus (+) in the appropriate column if the account is increased. Place a minus (-) in the appropriate column if the account is decreased.
Transactions:
1. Sold services on account to Navarro Company.
2. Received cash from sales
3. Received cash on account from Navarro Company.
4. Paid cash to owner for personal use.
5. Paid cash for rent.
Trans. No.
Assets
= Liabilities +
Owner’s Equity
Cash + Accts. Rec + Navarro Co.
Supplies +
Prepaid = Insurance
Accts. Pay – Barrett Co.
Vincent Orr, Capital
1.
2.
3.
4.
5.
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APPLICATION PROBLEM 1-3
Pg. 20 in text book. Complete in your Working Papers
Finished? Work on the 1-4 Mastery Problem and complete the Study Guide at the beginning of the chapter in the workbook.