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Basic Accounting Equations ACC 205

BASIC ACCOUNTING EQUATION Basic Accounting equations 1. Basic Concepts: Identification of assets(A), liability(L), revenue(R), or expense(E) a. A b. E c. L d. A e. R f. A g. A h. E 2. Analysis of transactions Assets=Liabilities + Owners Equity a. Total assets -$5,000 Owners Equity -$5,000 b. Total assets + Liabilities + c. Total assets + Owners Equity + d. Total assets - Owners Equity - e. Total assets +$22,000 Liability +$22,000 f. Total assets +$11,000

BASIC ACCOUNTING EQUATION Owners Equity +$11,000 g. Total assets - Liabilities - h. Total assets - Liabilities - 3. Balance Sheet preparation Preston Company Balance Sheet as at December 31, 19XX Fixed assets: Building Land Total Fixed assets Current Assets: $ Accounts Receivable 24,000 $ $ 44,000 21,000 65,000 $

Cash Total current assets

17,000 41,000

Total Assets 106,000

BASIC ACCOUNTING EQUATION Liabilities: Current liabilities: Accounts payable 11,000 Non-current assets: Loan payable Total liabilities Equity Capital Total Equity and liability 4. Statements Preparation a. Income statement Grimball Card, Income Statement for the year ended December 31, 19X1 $ Surgery revenue Expenses: Surgical expenses Salaries expenses Utilities expense Rent expense 80,000 30,000 5,000 15,000 $ 175,000 65,000 106,000 30,000 41,000

BASIC ACCOUNTING EQUATION Total expenses Net profit 45,000 (130, 0000)

b. Statement of owners equity Grimball Card, Statement of owners equity as at December 31, 19X1 $ Capital as at January 1, 19X1 19X1 owner investments 19X1 owner withdrawals (22,000) Profit for the year 45,000 300,000 2,000

Owners equity at January 1, 19X1325,000

c. Grimballs Balance Sheet Grimball Card, Balance Sheet for the year ended December 31, 19X1 $ Assets Fixed assets Surgical equipment Office equipment Total fixed assets Current assets: 37,000 118,000 155,000 $

BASIC ACCOUNTING EQUATION Accounts receivable Cash Total current assets Total assets Liabilities: Current liabilities Accounts payable Non-current liabilities Loan payable Total liabilities Owners equity Total liabilities and owners equity 10,300 25,000 325,000 350,000 14,700 135,000 60,000 195,000 350,000

5. Recognition of normal balances Classification into an asset, liability, revenue or expenses a. Assets b. Liability c. Expense d. Revenue e. Assets f. Asset g. Asset h. Liability

BASIC ACCOUNTING EQUATION i. Expense 6. Basic journal entries Details debit(db) $ Cash Land Jennifer-Capital To record investment in to the company by Jennifer Accounts receivable Revenue To record provision of services to Jason on credit Salaries Cash To record settlement of salaries expense Computer Accounts payable To record acquisition of computer on credit Cash Accounts receivable(Jason) To record settlement of debt by Jason Cash Loan payable To record acquisition of loan from Best Banc 7,500 7,500 800 800 3,200 3,200 250 250 1,200 1,200 15,000 10,000 25,000 Credit(cr) $

BASIC ACCOUNTING EQUATION 7. Journal entry preparation a. Journal presentation to reflect MuniServs January transactions including the $100,000 that rose from the owner of investment and loan. Date Credit $ 1 Cash Capital To record initial investment into the company by the owner Assets (land, building and vehicles) Cash Accounts payable To record acquisition on partial down payment and partly on credit Store equipment 4,600 $ Cash To record purchase of store equipment Loan payable 400 $ 4,600 65,000 45,000 20,000 100,000 100,000 $ Details Debit

BASIC ACCOUNTING EQUATION Interest expense on loan Cash To record settlement of loan and interest Salaries Cash To record of payment of salaries during January Advertising Cash To record cash paid on advertisements made Utility bill Accounts payable To record utility bill presented on end of January Cash Accounts receivable Revenue 3,700 5,700 9,400 200 200 700 700 2,300 2,300 100 500

To record the amount of money received and yet to be received on rendering of services on account b. Total debits=182,700

BASIC ACCOUNTING EQUATION Total credits=182,700 Balance that would be found in the companys cash account 103,700-53,100=50,600 c. Amount to be shown in the trial balance as accounts payable $20,200 will be credited in the trial balance


8. Balance Sheet Review According to the company I have used its annual reports, accounts receivable experienced the largest increase. On the hand, inventory account experienced the largest decrease. As potential investor I would consider the increase of accounts receivable positive. This is because there have been a significant increase in revenues which shows that increase in sales resulted to the increase in accounts receivable. The decrease in inventory was because of increase sales. At the end of every year there were very few inventories in the account. This is significant in reducing obsolete stock and reducing holding cost. In conclusion, the increase and decrease were positive.