Asset, Liability, Owner's Equity, Revenue, and Expense Accounts

chapter Asset, Liability, Owner’s College Accounting Equity, Revenue, and 11th Edition Expense Accounts

1– 1 After you have completed this chapter, you Learning Objectives will be able to do the following:

Assets are properties and other things of value owned and controlled by an economic unit or business entity. • Cash • Equipment • Copyright • Building • Land

• The owner’s right, claim, or financial interest is expressed by the word equity in the business. • Another term that could be used is capital

Suppose the total value of the assets is $80,000 and the business entity does not owe any amount against the assets.

What is the owner’s equity?

An entity’s assets consist of a truck that costs $35,000. The owner has invested $12,000, and the business entity has borrowed the remainder from the bank, which is a creditor.

We have now introduced a new classification, liabilities, which represents debt. The creditors’ claims to the assets have priority over the claims of the owners.

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

= +

Millie Adair has $17,000 invested in her travel agency, and the agency owes creditors $5,000; that is, the agency has liabilities of $5,000. What is the amount of assets?

Larry Roland owns a car repair shop. His business has assets of $40,000, and it owes creditors $16,000. What is the amount of owner’s equity?

Theo Viero’s insurance agency has assets of $86,000; his investment (his equity) amounts to $46,000. What is the amount of the agency’s liabilities?

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

J. Conner establishes her own business and calls it Conner’s Whitewater Adventure. Conner’s Whitewater Adventure is a sole proprietorship, a one-owner business.

1– 16 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (a) - Conner deposited $90,000 in a bank account in the name of the business.

Conner deposits $90,000 cash in a separate bank account in the name of Conner’s Whitewater Adventures.

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

1. What accounts are involved? 1. Cash and J. Conner, Capital 2. What are the classification of the 2. Cash is an asset and J. Conner, accounts involved? Capital is an owner’s equity account 3. Are the accounts increased or 3. Cash is increased because decreased? Conner’s Whitewater Adventures has more cash now than it had before J. Conner, Capital is increased because Conner has a greater investment now than she had before 4. Is the equation in balance after the 4. Yes transactions have been recorded?

1– 18 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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.

1– 19 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (b) - Conner bought equipment, paying cash, $38,000. It is important to note at this point that Conner does not invest any new money. She simply exchanges part of the business’s cash for equipment.

1– 20 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (c) - Company bought equipment on account from Signal Products, $4,320. • The Equipment account shows an increase because the business owns $4,320 more in equipment. • The liability account Accounts Payable is used for short-term liability or charge accounts. • The company to which money is owed, Signal’s Products, is called a creditor.

1– 21 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (c) - Company bought equipment on account from Signal Products, $4,320.

1– 22 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (d) - Company paid Signal Products, a creditor, $2,000 on account.

The amount paid will be applied against the firm’s liability of $42,320.The asset Cash and the liability Accounts Payable are both reduced by $2,000

1– 23 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (e) - Owner invested equipment with a fair market value of $5,200 in the business.

Conner invested her own computer equipment in the company. It has a fair market value of $5,200. The fair market value is the present worth of an asset.

1– 25 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The following observations apply to all types of business transactions: • Every transaction is recorded as an increase and/or decrease in two or more accounts • One side of the equation is always equal to the other side of the equation

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1– 29 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective

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 or credit card receipts.

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 When a business incurs or pays increase in owner’s equity occurs. expenses, owner’s equity decreases.

1– 33 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The chart of accounts is the official list of accounts tailor-made for the business.

1– 36 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (f) - Company sold whitewater rafting tours for cash, $8,000.

Conner receives cash revenue of $8,000 in return for whitewater rafting tours performed for customers over two weeks.

1– 37 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (g) - Company paid rent for the month, $1,250.

Shortly after opening the business, Conner pays the month’s rent of $1,250. 1– 38 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (h) - Company bought supplies on credit, $675.

Conner’s Whitewater Adventures buys office supplies costing $675 on credit from Fineman Company. 1– 39 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (h) - 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. 1– 40 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Steps 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.

Equal

1– 42 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (i) - Company receives a bill for an expense, $620.

The company receives a bill from the Times for newspaper advertising. Cash is not used because the bill has not been paid.

1– 43 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (k) - Company sold services on account. • Conner’s Whitewater Adventures signs a contract with Crystal River Lodge to provide rafting adventures for guest. Whitewater Adventures provides 27 one-day rafting tours and bills Crystal River Lodge for $6,750. • The company uses the Accounts Receivable account to record amounts due from charge customers. Accounts Receivable is an asset.

1– 44 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (k) - Company sold services on account.

1– 45 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (l) - Company paid creditor on account.

Conner’s Whitewater Adventures pays $1,500 to Signal Products, its creditor as part payment on account.

1– 46 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (m) - Company paid an expense in cash, $225.

Conner’s Whitewater Adventures receives a bill from Solar Power, Inc. for $225. This bill has not been previously recorded.

1– 47 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (n) - Company paid creditor on account, $620.

Conner’s Whitewater Adventures pays $620 to the Times for advertising.

Recall that this bill had been previously recorded as a liability in transaction (j). 1– 48 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (o) - Company paid an expense in cash.

Conner’s Whitewater Adventures pays wages of a part-time employee, $2,360.

1– 49 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (p) - Company buys equipment on account for $3,780, making a cash down payment of $1,850 and charging $1,930. • Conner’s Whitewater Adventures buys additional equipment from Signal Products for $3,780, paying $1,850 down with the remaining $1,930 on account. • Because buying an item on account is the same as buying on credit, both terms are used to describe such transactions and involve Accounts Payable.

1– 50 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (q) - Company buys equipment on account for $3,780, making a cash down payment of $1,850 and charging $1,930.

Note that three accounts are involved in this transaction – compound entry 1– 51 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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).

1– 52 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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.

1– 53 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transaction (s) - Owner makes a cash withdrawal, $3,500.

Conner withdraws $3,500 from the A withdrawal may be considered the business for personal living costs. opposite of an investment in cash by the owner.

1– 55 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1– 56 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

chapter Asset, Liability, Owner’s College Accounting Equity, Revenue, and 11th Edition Expense Accounts

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