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Owner Equity

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					  Accounting 100

     Chapter 2
Analyzing Business
   Transactions
                     1
              Objectives
 Record in equation form the financial
  effects of a business transaction.
 Define, identify, and understand the
  relationship between asset, liability, and
  owner’s equity account.
 Analyze the effects of business
  transactions on a firm’s assets,
  liabilities, and owner’s equity.
                                               2
     Business Transactions
 A financial event that changes the
  resources of the firm.
 May be a purchase, a sale, a receipt, or
  payment of cash.
 The effects of each transaction must be
  studied in order to know what and
  where to record.


                                             3
             Transaction #1
   Margery Meadows deposits $50,000 in
    the bank as the initial investment in her
    new business, Meadows Accounting.
    – Cash is increased by $50,000
    – Business capital is increased by $50,000




                                                 4
             Transaction #2
   Margery rents facilities for her new
    business by signing a lease for six
    months with monthly rent of $1,000
    – The rent is paid in advance for the next 6
      months in the amount of $6,000
    – Cash is decreased by $6,000




                                                   5
            Transaction #3
   Margery purchases a computer and
    other equipment for $8,000 with a check
    drawn on the bank.
    – The equipment increases by $8,000
    – The cash decreases by $8,000




                                              6
   Current Financial Position
Cash + Prepaid Rent + Equipment =Capital
+50,000                           =+ 50,000
- 6,000   +6,000
 44,000    6,000                  =   50,000
- 8,000                 + 8,000
 36,000    6,000          8,000   = 50,000




                                               7
    Accounting Classifications
 Assets: property owned by a business
 Liabilities: debts or obligations of a
  business
 Owner’s Equity: financial interest of
  the owner of a business (also known as
  proprietorship or net worth)



                                           8
         Fundamental Accounting
                       Equation

   Assets = Liabilities + Owner’s Equity

   Assets - Liabilities = Owner’s Equity

   Assets - Owner’s Equity = Liabilities


                                            9
      Solving the Equation
Assets = Liabilities + Owner’s Equity
   ?     = $ 5,000      +    $35,000
$39,000 =        ?      +    $35,000
$42,000 = $ 7,000       +         ?




                                        10
               Revenue

 Revenue: inflow of money or other
  assets (including claims to money) that
  results from sales of services or goods.
 Revenue increases owner’s equity.
 When revenues exceed expenses there
  is a profit (net income).

                                             11
             Expenses


 Expenses: outflow of money, the use of
  other assets, or the incurring of a
  liability.
 Expenses reduce owner’s equity.
 When expenses exceed revenues,
  there is a loss (net loss).
                                           12
             Transaction #4
   During the month of December,
    Meadows Accounting Services earned a
    total of $15,000 in revenue from clients
    who paid cash.
    – Cash increased by $15,000
    – Owner’s Equity increased by $15,000
       • (Fees Earned in the name of the revenue
         account)


                                                   13
            Withdrawals
 Withdrawals are funds taken from a
  business by the owner to pay personal
  items (non-business related).
 Withdrawals reduce owner’s equity, but
  are not considered a business expense.




                                           14
      Financial Statements
 Preparing accurate and informative
  financial statements is one of the
  accountant’s most important jobs.
 Business people use the financial
  statements to make decisions.




                                       15
                Income Statement

 A formal report showing the results of
  the business operations for a specific
  period of time.
 Only revenues and expenses are
  shown on the statement.
 Revenues - expenses = net income or
  (loss).

                                           16
    Statement of Owner’s Equity
 A report showing changes that occurred
  in the owner’s financial interest during a
  specific period of time.
 The amount of net income (loss) is the
  connecting link between the income
  statement & statement of owner’s equity



                                               17
            Balance Sheet
 A formal report of the firm’s financial
  position which lists the assets, liabilities,
  and owner’s equity on a specific date.
 The link between the balance sheet
  and the statement of owner’s equity is
  the revised owner’s investment which
  is calculated on the Statement of
  Owner’s Equity.
                                                  18
Chapter 2
The End




            19

				
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