2/28/2014

BUSINESS ENTITY
Accounting Equation An individual, association, or
organization
Presented By
That engages in economic activities
Md. Mahedi Hasan
And controls specific economic resources
BBA (DU), CA Advance Stage (ICAB under ICAEW Syllabus) Business entity’s finances kept separate
Deputy Manager, ACNABIN, Chartered Accountants
from those of owner (Business Entity
Concept)

ASSETS ASSETS

ITEMS OWNED BY A BUSINESS THAT ITEMS OWNED BY A BUSINESS THAT

WILL PROVIDE FUTURE BENEFITS WILL PROVIDE FUTURE BENEFITS

BUT DOESN’T HAVE

MUST BE “OWNED” TO BE PAID OFF,
NOT RENTED COULD STILL BE MAKING
PAYMENTS ON IT

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ASSETS ACCOUNTS RECEIVABLE

EXAMPLES: The amount of money owed to the
CASH MACHINERY business
MERCHANDISE By its customers
BUILDINGS
As a result of making sales “on account”
FURNITURE LAND or “on credit”
FIXTURES Simply, customers who have promised to
ACCOUNTS RECEIVABLE pay sometime in the future

LIABILITIES LIABILITIES

PROBABLE FUTURE OUTFLOW OF EXAMPLES:

ASSETS AS A RESULT OF A PAST
TRANSACTION OR EVENT ACCOUNTS PAYABLE
NOTES PAYABLE
IN OTHER WORDS,
DEBTS OR OBLIGATIONS OF THE
BUSINESS THAT CAN BE PAID WITH
CASH, GOODS , OR SERVICES

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ACCOUNTS PAYABLE NOTES PAYABLE

Unwritten promise to pay a supplier for Formal written promises to pay suppliers
assets purchased or services rendered or lenders
Referred to as making a purchase “on Specific sums of money at definite future
account” or “on credit” times

Be careful!! Don’t confuse Accounts

Receivable and Accounts Payable.
Ask yourself, are we waiting to receive? Or
waiting to pay?

OWNER’S EQUITY EXAMPLE:

AMOUNT BY WHICH THE BUSINESS If a business has total Assets of $100,000
ASSETS EXCEED THE BUSINESS and total Liabilities of $60,000, what is the
LIABILITIES Owner’s Equity?

ALSO CALLED:
Once the debts are paid,
the remaining assets belong
NET to the owner (Owner’s Equity).
WORTH
OR CAPITAL

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BUSINESS ENTITY
EXAMPLE:
CONCEPT
If a business has total Assets of $100,000 Owner may have business assets and
and total Liabilities of $60,000, what is the liabilities and nonbusiness assets and
Owner’s Equity? liabilities
FORMULA: Nonbusiness assets and liabilities are not
ASSETS LIABILITIES = OWNER’S EQUITY included in the entity’s accounting
records
$100,000 $60,000 = $40,000 If owner invests money or other assets in
Can also be expressed as: the business, the item is now a business
Assets = Liabilities + Owner’s Equity asset

ACCOUNTING EQUATION ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity Assets = Liabilities + Owner’s Equity

Left side: Right side shows where

Assets the money came from to
buy the assets

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BUSINESS TRANSACTION ACCOUNT

An economic event that has a direct A separate record used to summarize
impact on the business changes in each asset, liability, and
Usually requires an exchange with an owner’s equity of a business
outside entity
Must be able to measure this exchange in
Monetary Value
All transactions affect the accounting
equation through specific accounts

ANALYZING BUSINESS QUESTION #1

TRANSACTIONS
THREE QUESTIONS:
WHAT HAPPENED?

Make certain you understand the

event that has taken place.

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QUESTION #2 QUESTION #3

WHICH ACCOUNTS ARE HOW IS THE ACCOUNTING

AFFECTED? EQUATION AFFECTED?
•Identify the accounts that are •Determine which accounts have
affected. increased or decreased.
•Classify these accounts as assets, •Make certain that the accounting
liabilities, or owner’s equity. equation remains in balance after
the transaction has been entered.

Let’s analyze the effect of

transactions on the accounting EXAMPLE:
equation for Mary Adams MARY ADAMS, THE OWNER,
Consulting INVESTED $25,000 IN THE
BUSINESS

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QUESTION #1 QUESTION #2a

What happened? Identify accounts that are affected

Mary took $25,000 from her CASH M. A.

personal bank account and deposited it CAPITAL
in a new account in the business’ name

QUESTION #2b QUESTION #3a

Classify these accounts Determine whether the accounts
have increased or decreased

CASH M. A. CASH M. A.
CAPITAL CAPITAL
ASSET OWNER’S INCREASED INCREASED
EQUITY

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QUESTION #3b EXAMPLE:

Does accounting equation balance? PURCHASED OFFICE
SUPPLIES FOR $800 CASH
ASSETS = LIABILITIES + OWNER’S EQUITY
CASH = M. A.,CAPITAL
+$25,000 = +$25,000
It Balances!
Assets of $25,000 = Liab. of $0
plus Owner’s Equity of $25,000

QUESTIONS #1 & #2 QUESTION #3a

Understand the transaction, Increase or Decrease?
Identify and Classify the affected
OFFICE CASH
accounts
SUPPLIES
OFFICE CASH ASSET ASSET
SUPPLIES
ASSET ASSET
INCREASED DECREASED

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QUESTION #3b QUESTION #3b

Let’s look at the accounting equation Does transaction balance?

ASSETS = LIAB. + O. E. ASSETS = LIAB. + O. E.

CASH + OFF. SUPPLIES = CASH + OFF. SUPPLIES =
-$800 + +$800 = -$800 + +$800 =
Yes!
Right hand side Total Assets stayed the same.
of equation is One Asset increased, the other
not affected decreased. No change in
Liabilities or Owner’s Equity

PROVING ACCOUNTING PROVING ACCOUNTING

EQUATION BALANCES: EQUATION BALANCES:
ASSETS: LIABILITIES OWNER’S EQUITY
CASH OFFICE SUPPLIES
$25,000 BALANCE $0 $25,000
- $800 $800
BALANCE $24,200 $800 BALANCE $0 $25,000
LEFT SIDE OF EQUATION: RIGHT SIDE OF EQUATION:
CASH $24,200 LIABILITIES $ 0
SUPPLIES $ 800 OWNER’S EQUITY $25,000
TOTAL ASSETS $25,000 TOTAL LIAB. & O.E. $25,000

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EXAMPLE QUESTIONS #1 & #2

PURCHASED EQUIPMENT ON Understand the transaction,

ACCOUNT FOR $3,000 Identify and Classify the affected
accounts
Mary is buying this copy machine
“on account.” She will be making
payments on it over the next few
years.
NO CASH WAS EXCHANGED TODAY

QUESTIONS #1 & #2 QUESTION #3a

Understand the transaction, Increase or Decrease?
Identify and Classify the affected
EQUIP. ACCOUNTS
accounts
PAYABLE
EQUIP. ACCOUNTS ASSET LIABILITY
PAYABLE
ASSET LIABILITY
INCREASED INCREASED

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QUESTION #3b QUESTION #3b

Let’s look at the accounting equation: Does transaction balance?

ASSETS = LIABILITIES + OWNER’S EQUITY ASSETS = LIABILITIES + OWNER’S EQUITY

EQUIP. = ACCOUNTS EQUIP. = ACCOUNTS
PAYABLE PAYABLE
+ $3,000 = + $3,000 This transaction had + $3,000 = + $3,000
no effect on It Balances!
Owner’s Equity Assets increased by $3,000 =
Liab. Increased by $3,000

PROVING ACCOUNTING PROVING ACCOUNTING

EQUATION BALANCES: EQUATION BALANCES:
ASSETS: LIABILITIES OWNER’S EQUITY
CASH + SUPPLIES + EQUIPMENT ACCTS. PAY. M. A., CAPITAL
$25,000 +$25,000
- $800 $800
BAL. $24,200 $800 BAL. $25,000
+$3,000 +$3,000
BAL. $24,200 $800 $3,000 BAL. $3,000 $25,000

SUPPLIES $ 800
$24,200+$800+$3,000= $3,000 + $25,000 =$28,000
$25,000
$28,000 TOTAL ASSETS TOTAL LIAB. & O. E.

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EXAMPLE QUESTIONS #1 & #2

MADE $400 PAYMENT ON EQUIPMENT Understand the transaction,
Identify and Classify the affected
accounts
CASH ACCOUNTS
PAYABLE
ASSET LIABILITY

QUESTION #3a QUESTION #3b

Increase or Decrease? Let’s look at the accounting equation:
CASH ACCOUNTS ASSETS = LIABILITIES + OWNER’S EQUITY
PAYABLE CASH = ACCOUNTS
ASSET LIABILITY PAYABLE
- $400 = - $400 This transaction had
no effect on
DECREASED DECREASED
Owner’s Equity

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PROVING ACCOUNTING
QUESTION #3b
EQUATION BALANCES:
ASSETS:
Does transaction balance?
CASH SUPPLIES EQUIPMENT
$25,000
ASSETS = LIABILITIES + OWNER’S EQUITY - $800 $800
CASH = ACCOUNTS BAL. $24,200 $800
PAYABLE +$3,000
BAL. $24,200 $800 $3,000
- $400 = - $400
-$400
It Balances! BAL. $23,800SUPPLIES
$800 $3,000
Assets decreased by $400 =
Liab. decreased by $400
$27,600

PROVING ACCOUNTING OWNER’S EQUITY

EQUATION BALANCES: TRANSACTIONS
LIABILITIES OWNER’S EQUITY
FOUR TYPES:
ACCTS. PAY. M. A., CAPITAL
+$25,000 DECREASE: INCREASE:
EXPENSES REVENUES
BAL. $25,000
+$3,000
DRAWING INVESTMENTS
BAL. $3,000 $25,000
-$400
BAL. $2,600 $25,000
$27,600

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REVENUE REVENUE
Amount a business charges customers for EXAMPLES:
products sold or services performed Delivery Fees
Recognized when earned (even if cash Consulting Fees
has not yet been received)
Rent Revenue (if business rents space to
Increases both Assets (Cash or Accounts others)
Receivable) and Owner’s Equity
Interest Revenue (for interest earned on
bank deposits)
Sales (for sales of merchandise)

EXPENSES EXPENSES
Represent the decrease in assets as a EXAMPLES:
result of efforts made to produce
revenues Rent Supplies Consumed
Separate accounts are maintained for
Salaries Taxes
each type of expense
Either decrease assets or increase
liabilities, but ALWAYS decrease
Owner’s Equity

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NET INCOME NET LOSS

REVENUE Greater than EXPENSES = NET INCOME EXPENSES Greater than REVENUE = NET LOSS
EXAMPLE: Luke Perkins performed $6,000 of Tax services EXAMPLE: John Atwood performed $8,000 of Delivery
(Revenue) this year and incurred expenses of $1,500 for services (Revenue) this year and incurred Expenses of
Rent, $500 for Supplies, and $3,000 in Salaries. $3,500 for Rent, $500 for Supplies, $3,000 in Salaries and
$2,500 for Gasoline.
REVENUE EXPENSES = NET INCOME
$6,000 $5,000 = $1,000 REVENUE EXPENSES = NET LOSS
$8,000 $9,500 = ($1,500)
$1,500 + $500 + $3,000
$3,500 + $500 + $3,000 + $2,500

ACCOUNTING PERIOD
WITHDRAWALS
CONCEPT
Say that income can be determined for The owner taking (withdrawing) cash or
any period of time (month, quarter, year, other assets from the business for personal
etc.) use
Any accounting period of twelve months Reduces Owner’s Equity and Assets
is called a FISCAL YEAR
Also referred to as Drawing

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REVENUE EXAMPLE: QUESTIONS #1 & #2

MARY PERFORMED SERVICES Understand the transaction,
AND RECEIVED $4,500 IN CASH Identify and Classify the affected
accounts
CONSULT. CASH
FEES
O.E. ASSET
REVENUE

QUESTION #3a QUESTION #3b

Increase or Decrease? Does transaction balance?

CONSULT. CASH ASSETS = LIAB. + OWNER’S EQUITY

FEES CASH = CONSULT.
FEES
+$4,500 = +$4,500
INCREASE INCREASE
It Balances!
Assets increased by $4,500 =
Owner’s Equity increased by $4,500

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PROVING ACCOUNTING PROVING ACCOUNTING

EQUATION BALANCES: EQUATION BALANCES:
ASSETS: LIAB. OWNER’S EQUITY
CASH SUPPLIES EQUIPMENT ACCTS. M. A., CONSULT.
BAL. $23,800 $800 $3,000 PAY. CAPITAL FEES
+ $4,500 BAL. $2,600 $25,000
BAL. $28,300 $800 $3,000 + $4,500
BAL. $2,600 $25,000 $4,500

$32,100 $32,100

EXPENSE EXAMPLE QUESTIONS #1 & #2

Understand the transaction,
MARY ADAMS PAID HER Identify and Classify the affected
ASSISTANT $750 IN WAGES accounts
WAGES CASH
EXPENSE
O.E. ASSET
EXPENSE

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QUESTION #3 QUESTION #3
Increase or Decrease? Increase or Decrease?
WAGES CASH WAGES CASH
EXPENSE EXPENSE
BE CAREFUL! While incurring an
INCREASE DECREASE expense will increase the Expense account,
it will cause an overall
DECREASE IN OWNER’S EQUITY

PROVING ACCOUNTING
QUESTION #3b EQUATION BALANCES:
ASSETS:
Does transaction balance?
CASH SUPPLIES EQUIPMENT
BAL. $28,300 $800 $3,000
ASSETS = LIAB. + OWNER’S EQUITY - $750
CASH = WAGES BAL. $27,550 $800 $3,000
EXPENSE
- $750 = +$750
It Balances!
Assets decreased by $750 = $31,350
Owner’s Equity decreased by $750

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PROVING ACCOUNTING REVENUE ON ACCOUNT

EQUATION BALANCES: EXAMPLE:
LIAB. OWNER’S EQUITY
M. A., REV. EXPENSES
MARY PERFORMED $6,000 OF
ACCTS.
PAY. CAPITAL SERVICES ON ACCOUNT
BAL. $2,600 $25,000 $4,500
+ $750
BAL. $2,600 $25,000 $4,500 $750

$2,600 + $25,000 + $4,500 $750 =

$31,350

QUESTIONS #1 & #2 QUESTIONS #1 & #2

Understand the transaction, Identify Understand the transaction, Identify
and Classify the affected accounts and Classify the affected accounts

CONSULT. ACCOUNTS
Mary has performed services for this FEES RECEIVABLE
client. Client will be paying Mary O.E. ASSET
at a later date. REVENUE
IT IS REVENUE EVEN THOUGH NO
CASH CHANGED HANDS TODAY!

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QUESTION #3a QUESTION #3b

Increase or Decrease? Does transaction balance?
CONSULT. ACCOUNTS ASSETS = LIAB. + OWNER’S EQUITY
FEES RECEIVABLE ACCTS. = CONSULT.
RECEIVABLE FEES
+$6,000 = +$6,000
INCREASE INCREASE
It Balances!
Assets increased by $6,000 =
Owner’s Equity increased by $6,000

PROVING ACCOUNTING PROVING ACCOUNTING

EQUATION BALANCES: EQUATION BALANCES:
ASSETS: LIAB. OWNER’S EQUITY
CASH ACCTS. SUPPLIES EQUIP. ACCTS. M. A., REV. EXPENSES
REC. PAY. CAPITAL
BAL. $27,550 $800 $3,000 BAL. $2,600 $25,000 $4,500 $750
+ $6,000 + $6,000
BAL. $2,600 $25,000 $10,500 $750
BAL. $27,550 $6,000 $800 $3,000

$2,600 + $25,000 + $10,500 $750

$37,350 = $37,350

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CUSTOMER PAYMENT
QUESTIONS #1 & #2
EXAMPLE
RECEIVED $2,500 IN CASH FOR Understand the transaction, Identify
SERVICES PERFORMED IN and Classify the affected accounts
PREVIOUS TRANSACTION
When Mary provided the consulting
services, this client agreed to pay
at a later date.
TODAY THEY GAVE MARY CASH
OF $2,500 AS A PARTIAL PAYMENT.

QUESTIONS #1 & #2 QUESTION #3a

Understand the transaction, Identify Increase or Decrease?
and Classify the affected accounts
CASH ACCOUNTS
CASH ACCOUNTS RECEIVABLE
RECEIVABLE
ASSET ASSET
INCREASE DECREASE

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PROVING ACCOUNTING
QUESTION #3b
EQUATION BALANCES:
Does transaction balance? ASSETS:
CASH ACCTS. SUPPLIES EQUIP.
REC.
ASSETS = LIAB. + O. E.
BAL. $27,550 $6,000 $800 $3,000
CASH ACCTS. REC. =
+$2,500 -$2,500 +$2,500 -$2,500
= BAL. $30,050 $3,500 $800 $3,000
Yes!
Total Assets stayed the same.
One Asset increased, the other
decreased. No change in $37,350
Liabilities or Owner’s Equity

PROVING ACCOUNTING
DRAWING EXAMPLE:
EQUATION BALANCES:
LIAB. OWNER’S EQUITY
M. A., REV. EXPENSES
MARY WITHDREW $1,500
ACCTS.
PAY. CAPITAL FOR PERSONAL EXPENSES
BAL. $2,600 $25,000 $10,500 $750
BAL. $2,600 $25,000 $10,500 $750

No Change to Right Side of Equation.

Still = $37,350

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QUESTIONS #1 & #2 QUESTIONS #1 & #2

Understand the transaction, Identify Understand the transaction,
and Classify the affected accounts Identify and Classify the affected
accounts
Mary is withdrawing some of her
M. A., CASH
equity in the business by taking home an DRAWING
asset (Cash). This will reduce the Assets & O.E. ASSET
reduce her Owner’s Equity. DRAWING

QUESTION #3a QUESTION #3a

Increase or Decrease? Increase or Decrease?
M. A., CASH M. A., CASH
DRAWING DRAWING

BE CAREFUL! Just like Expenses,

INCREASE DECREASE Drawing account will increase in this situation,
but it will cause an overall
DECREASE IN OWNER’S EQUITY.

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PROVING ACCOUNTING
QUESTION #3b
EQUATION BALANCES:
ASSETS:
Does transaction balance?
CASH ACCTS. SUPPLIES EQUIP.
REC.
ASSETS = LIAB. + OWNER’S EQUITY
BAL. $30,050 $3,500 $800 $3,000
CASH = M.A.,
-$1,500
DRAWING
BAL. $28,550 $3,500 $800 $3,000
-$1,500 = +$1,500
It Balances!
Assets decreased by $1,500 =
Owner’s Eq. decreased by $1,500
$35,850

PROVING ACCOUNTING
FINANCIAL STATEMENTS
EQUATION BALANCES:
LIAB. OWNER’S EQUITY
ACCTS. M. A., M. A., REV. EXP.
THREE COMMONLY PREPARED
PAY. CAP. DRAWING
FINANCIAL STATEMENTS:
BAL. $2,600 $25,000 $10,500 $750
+$1,500 o INCOME STATEMENT
BAL. $2,600 $25,000 $1,500 $10,500 $750 o STATEMENT OF OWNER’S EQUITY
o BALANCE SHEET

$2,600 + $25,000 - $1,500 + $10,500 -$750

= $35,850

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Jessica Jane’s Campus Delivery

Income Statement
INCOME STATEMENT For Month Ended June 30, 20--

Reports the profitability of business

operations Financial Statement headings:
For a specific period of time 1st line: Name of Company
Expenses are subtracted from Revenues 2nd line: Title of statement
to determine Net Income/Loss 3rd line: Time period
or specific date
Also called Profit and Loss Statement or
Operating Statement

Jessica Jane’s Campus Delivery Jessica Jane’s Campus Delivery

Income Statement Income Statement
For Month Ended June 30, 20-- For Month Ended June 30, 20--

This column is used

for listing items
to be totaled This column is used
for Totals

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Jessica Jane’s Campus Delivery Jessica Jane’s Campus Delivery

Income Statement Income Statement
For Month Ended June 30, 20-- For Month Ended June 30, 20--

Revenues: Revenues:
Consulting Fees $2,150 Consulting Fees $2,150

Expenses:
Wages Expense $ 650
First item at the top of Rent Expense 200
a column should include Telephone Expense 50
“$” Total Expenses 900

Underline before totaling

Jessica Jane’s Campus Delivery Jessica Jane’s Campus Delivery

Income Statement Income Statement
For Month Ended June 30, 20-- For Month Ended June 30, 20--

Revenues: Revenues:
Consulting Fees $2,150 Consulting Fees $2,150

Expenses: Expenses:
Wages Expense $ 650 Wages Expense $ 650
Rent Expense 200 Rent Expense 200
Telephone Expense 50 Telephone Expense 50
Total Expenses 900 Total Expenses 900
Net Income $1,250 Net Income $1,250

Revenues are greater than Expenses, Double underline

therefore total is called NET INCOME

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Jessica Jane’s Campus Delivery

Statement of Owner’s Equity
STATEMENT OF OWNER’S For Month Ended June 30, 20--
EQUITY
Jessica Jane, capital, June 1, 20-- $2,000
Net Income for June $1,250
Reports the activities that affected
Owner’s Equity
For a specific period of time
Instead of showing Revenue increasing &
Uses Net Income from Income Statement Expenses decreasing the Owner’s Equity,
this statement uses the net effect
(Net Income/Loss) from the
Income Statement.

Jessica Jane’s Campus Delivery Jessica Jane’s Campus Delivery

Statement of Owner’s Equity Statement of Owner’s Equity
For Month Ended June 30, 20-- For Month Ended June 30, 20--

Jessica Jane, capital, June 1, 20-- $2,000 Jessica Jane, capital, June 1, 20-- $2,000
Net Income for June $1,250 Net Income for June $1,250
Less withdrawal for June 150 Less withdrawal for June 150
Increase in Capital 1,100 Increase in Capital 1,100
Jessica Jane, capital, June 30, 20-- $3,100

$1,250 Net Income - $150 Withdrawal = $2,000 beginning O. E. + $1,100 increase =

$1,100 increase in Capital
$3,100

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Jessica Jane’s Campus Delivery

Balance Sheet
BALANCE SHEET June 30, 20--

Confirms the accounting equation has

remained in balance
Includes: Assets, Liabilities, Owner’s
Equity Balance Sheet reports Assets,
Liabilities and Owner’s Equity
Also called Statement of Financial
on a SPECIFIC DATE,
Position or Statement of Financial
Not a period of time
Condition

Jessica Jane’s Campus Delivery

Balance Sheet
June 30, 20-- ACCOUNTING PROCESS
Assets Liabilities
Cash $ 370 Accounts Payable $1,800
Accounts Receivable 650 THREE BASIC PHASES:
Supplies 80 Owner’s Equity
Prepaid Insurance 200 Jessica Jane, Capital 3,100 oInput
Delivery Equipment 3,600
Total Liabilities and oProcessing
Total Assets $4,900 Owner’s Equity $4,900
oOutput

It Balances!!!

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INPUT PROCESSING
•Identify accounts
Transactions •Classify accounts
provide the
necessary •Increase or Decrease?
input •Enter transaction and
verify balance

OUTPUT OUTPUT
INCOME STATEMENT OF BALANCE SHEET
STATEMENT OWNER’S EQUITY
ASSETS
REVENUES BEGINNING CAPITAL equal
minus plus
INVESTMENTS LIABILITES
EXPENSES plus plus
equals NET INCOME
minus OWNER’S EQUITY
NET INCOME (Ending Capital)
WITHDRAWALS
equals
ENDING CAPITAL

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