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# Owner Equity

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```									  Accounting 100

Chapter 2
Transactions
1
Objectives
 Record in equation form the financial
 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
 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
– 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
 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,
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
 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
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

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