CH 1 Part 2

The Accounting Equation
Basic Accounting Equation

• Provides underlying framework for recording and summarizing
economic events
• Assets are claimed by either creditors or owners
• If a business is liquidated, claims of creditors must be paid
before ownership claims
Assets
• Resources a business owns
• Provide future services or benefits
• Cash, Supplies, Equipment, etc.
Liabilities
• Claims against assets (debts and obligations)
• Creditors (party to whom money is owed)
• Accounts Payable, Notes Payable, Salaries and Wages Payable,
etc.
Owner’s Equity
• Ownership claim on total assets
• Referred to as residual equity
• Investment by owners and revenues increases owner's equity
• Drawings and expenses decreases owner's equity
Increase in Owner’s Equity

• Investment by Owner. Assets the owner puts into the business
• Revenues. Increases in assets or decreases in liabilities
resulting from sale of goods or performance of services in normal
course of business
Decrease in Owner’s Equity
• Drawings. A withdraw of cash or other assets for personal use
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• Expenses. Cost of assets consumed or services used in the
process of earning revenue
Classify the following items as investment by owner (I), owner’s
drawings (D), revenues (R), or expenses (E). Then indicate whether
each item increases or decreases owner’s equity.
Analyzing Business Transactions
Transactions are a business’s economic events recorded by
accountants.
• May be external or internal
• Not all activities represent transactions
• Have a dual effect on the accounting equation
89. Owner's equity is best depicted by the following:
a. Assets = Liabilities. b. Liabilities + Assets.
c. Residual equity + Assets. d. Assets – Liabilities.
90. The basic accounting equation may be expressed as
a. Assets = Equities. b. Assets – Liabilities = Owner's Equity.
c. Assets = Liabilities + Owner's Equity. d. all of these.
91. Liabilities
a. are future economic benefits. b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.
92. Liabilities of a company would not include
a. notes payable. b. accounts payable.
c. wages payable. d. cash.
93. Liabilities of a company are owed to
a. debtors. b. benefactors.
c. creditors. d. underwriters.
96. When an owner withdraws cash or other assets from a business for personal
use, these withdrawals are termed
a. depletions. b. consumptions.
c. drawings. d. a credit line.
97. Capital is
a. an owner's permanent investment in the business.
b. equal to liabilities minus owner's equity.
c. equal to assets minus owner's equity.
d. equal to liabilities plus drawings.
98. Revenues would not result from
a. sale of merchandise. b. initial investment of cash by owner.
c. performance of services. d. rental of property.
99. Sources of increases to owner's equity are
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a. additional investments by owners. b. purchases of merchandise.
c. withdrawals by the owner. d. expenses.
BE 165
Match the following terms and definitions.
a. Accounts receivable c. Accounts payable
b. Creditor d. Note payable
_______ (1) Amounts due from customers
_______ (2) Amounts owed to suppliers for goods and services purchased
_______ (3) Amounts owed to bank
_______ (4) Party to whom money is owed
BE 167
Use the accounting equation to answer the following questions.
1. West Wind Sails Co. has total assets of $120,000 and total liabilities of
$35,000. What is owner’s equity?
2. Mercy Family Center has total assets of $225,000 and owner’s equity of
$105,000. What are total liabilities?
3- Cucina Med Restaurant has total liabilities of $40,000 and owner’s equity
of $95,000. What are total assets?
BE 170
Identify the impact on the accounting equation of each of the following
transactions.
1. Purchase office supplies on account.
2. Paid secretary weekly salary.
3. Purchased office furniture for cash.
4. Received monthly utility bill to be paid at later time.
Ex. 176
Determine the missing amount for each of the following.
Assets = Liabilities + Owner's Equity
1. (a) $50,000 $95,000
2. $125,000 (b) $85,000
3. $140,000 $65,000 (c)
Ex. 186
Analyze the transactions of a business organized as a proprietorship described
below and indicate their effect on the basic accounting equation. Use a plus sign
(+) to indicate an increase and a minus sign (–) to indicate a decrease.
Assets = Liabilities + Owner's Equity

1. Received cash for services rendered.
2. Purchased office equipment on credit.
3. Paid employees' salaries.
4. Received cash from customer in payment
6. Paid for office equipment purchased in
8. Owner withdrew cash for personal
10. Billed customers for services rendered.
Ex. 187
For each of the following, indicate whether the transaction increased (+),
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decreased (-), or had no effect (NE) on assets, liabilities, and owner's equity using
the following format. Assets = Liabilities + Owner's Equity
1. Made an investment to start the business.
2. Billed customers for services performed.
3. Purchased equipment on account.
4. Withdrew cash for personal use.
5. Paid for equipment purchased in 3. above.
E1-5 Meredith Cleaners has the following balance sheet items.

Accounts payable Accounts receivable
Cash Notes payable
Cleaning equipment Salaries payable
Cleaning supplies Karin Meredith, Capital
Instructions Classify each item as an asset, liability, or owner’s equity.
E1-6 Selected transactions for Evergreen Lawn Care Company are listed below.
1. Made cash investment to start business.
2. Paid monthly rent.
3. Purchased equipment on account.
4. Billed customers for services performed.
5. Withdrew cash for owner’s personal use.
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Instructions
List the numbers of the above transactions and describe the effect of each
transaction on assets, liabilities, and owner’s equity.
E1-7 Brandon Computer Timeshare Company entered into the following
transactions during May 2010.
1. Purchased computer terminals for $20,000 from Digital Equipment on
account.
2. Paid $4,000 cash for May rent on storage space.
3. Received $15,000 cash from customers for contracts billed in April.
4. Provided computer services to Fisher Construction Company for $3,000 cash.
5. Paid Northern States Power Co. $11,000 cash for energy usage in May.
6. Brandon invested an additional $32,000 in the business.
7. Paid Digital Equipment for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $1,200 on account.
Instructions
List the numbers of the above transactions and describe the effect of each
transaction on assets, liabilities, and owner’s equity.

CH 1 Part 2

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CH 1 Part 2

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The Accounting Equation

Basic Accounting Equation

Increase in Owner’s Equity

Assets = Liabilities + Owner's Equity

E1-5 Meredith Cleaners has the following balance sheet items.

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