LESSON 1-2LESSON 1-2

How Business Activities Change the Accounting Equation

RECAPRECAP

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LESSON 1-2

What is the accounting Equation? Assets = Liability + Owner’s equity

What side of the equation are Assets on? What side is Liabilities and OE on? What is an Asset? What is a Liability? What is Owner’s Equity?

AccountsAccounts

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LESSON 1-2

Each section of the equation has many 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 dollar amount in an account

Capital, Kim ParkerCapital, Kim Parker

Capital: account used to summarize the owner’s equity in a business

Account title: Capital, Kim Parker How much, or the value of the company that is the owner’s “His/Her share of the kitty” Used to record any investments by the owner in the

company

Is this an Asset, a Liability, or Owner’s Equity Account?

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LESSON 1-2

CashCash

Cash: The amount of money the company has in its bank account

Is Cash something you own or owe? “So is it an Asset, a Liability, or Owner’s Equity

Account? It is an Asset as the business owns the cash……

Account Title: Cash Is this on the left side or the right side of the

equation? Left for all assets

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LESSON 1-2

Prepaid Insurance:Prepaid Insurance:

Prepaid Insurance: Insurance premiums paid in advance for insurance coverage -

“prepaid” Guaranteed coverage during the specified time

If you prepaid it, do you owe or own the insurance policy? You own the coverage

Is this an Asset, Liability, or OE? Asset

Is it on the left or the right side of the equation?

Account Title: Prepaid Insurance Why is this considered an asset?

Has value - if the company liquidates, insurance company refunds unused portion

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SuppliesSupplies

Supplies: Items needed to operate the business Not for sell to customers Example: pens, papers, ink for printers etc….

Do we own or owe supplies? Own

Is this an asset or a liability? Asset

What side of the equation is it on? Left

Account Title: Supplies

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LESSON 1-2

Accounts PayableAccounts Payable

Purchase something on credit – pay for it later Example: buy an office desk and they will be me later

Do you own credit or owe credit? Increases what you owe

Is this an Asset, Liability, or OE Liability

But what about the desk? Do you own or owe it? Increases the value of Supplies as you own it, and increases

what you owe as you still need to pay for it.

Does not increase the value of OE

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LESSON 1-2

TransactionsTransactions

Transaction: a business activity that changes assets, liabilities, or owner’s equity Involves buying, selling, or writing something off $$$ involved Accounting equation changes with each transaction – both

sides must always be equal All transaction Impact 2 accounts

Can be one on each side or two on one side of the equation

Always ask the question “Does my account balance go up or go down with this transaction”.

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LESSON 1-2

Chart of Accounts Hand outChart of Accounts Hand outBalance Sheet Accounts: 

(100) Assets110 Cash120 Petty Cash130 Accounts Receivable _Oakdale School140 Accounts Receivable – Campus Internet Cafe150 Supplies160 Prepaid Insurance

(200) Liabilities:210 Accounts Payable – Supply Depot220 Accounts Payable – Thomas Supply Company

(300) Owner’s Equity310 Kim Park, Capital320 Kim Park, Drawing330 Income Summary

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RECEIVING CASHRECEIVING CASH

Transaction 1 August 1. Received cash from owner as an investment, $5,000.00.

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LESSON 1-2

PAYING CASHPAYING CASH

Transaction 2 August 3. Paid cash for supplies, $275.00.

Transaction 3 August 4. Paid cash for insurance, $1,200.00.

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TRANSACTIONS ON ACCOUNTTRANSACTIONS 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.

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Think about it:Think about it:

Is it an Asset, a Liability, or Owner’s Equity: Cash Accounts Payable Accounts Receivable Capital Account Prepaid Insurance Supplies

Which account is used to: Show the owner’s equity in the business To show how much the business owes to a supplier To show the value of supplies owned by the business

What is the Accounting Equation?

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LESSON 1-2

Asset

Asset

Asset

Liability

Asset

OE

PracticePractice

An activity that changes assets, liabilities or Owners Equity?

Keeping business Records separate from personal records is what concept?

A record of all information on one single item in the equation?

The name given to an account? The amount in an account is called? The account to summarize the owner’s equity?

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LESSON 1-2

Account Balance Account Transaction Business Entity Account Title Capital

True or FalseTrue or False

Transactions: Always impact more than one account? Always increase one account and decrease another? Always are on different sides of the equation? An investment from the owner in the business impacts the

cash and OE accounts? If you purchase supplies on account, the cash account

increases? If you purchase supplies on account, the value of Accounts

Payable decreases?

T

FF

T

F

F

Work Together 1 - 2Work Together 1 - 2

Trans No. Assets = Liabilities + Owner’s Equity

1 + +

2 + +

3 - +

4 - -

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LESSON 1-2