Chapter One Introduction to Accounting Fundamentals

Chapter One
Asset, Liability,
Owner’s Equity,
Revenue, and
Expense Accounts
Chapter One
• Asset, Liability, Owner’s
Equity,
Accounting Is Fun! 1-3

• WHO WANTS TO BE A
BILLIONAIRE?

WHERE DOES YOU MONEY GO?

HUGOT SA ENTREP
INTEREST PROFIT
INVEST
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Performance Objectives
1. Define and identify asset, liability, and

owner’s equity accounts
2. Record a group of business
transactions, in column form, involving
changes in assets, liabilities, and
owner’s equity

Performance Objectives
3. Define and identify revenue and

expense accounts
4. Record a group of business
transactions, in column form, involving
all five elements of the fundamental
accounting equation

Fundamental Accounting Equation
• A = L + OE
• Assets = Liabilities + Owner’s Equity
Amounts
Items Owner’s
owed to
owned investment
creditors

Performance Objective 1
Define and identify asset, liability, and

owner’s equity accounts
Accounting Is Fun! 1 - 10
Define Asset
• Asset
– Cash, properties, and other things of value
owned by an economic unit or business
entity
– Provides (probable) future economic
benefits
Identify Assets
• Examples of assets:
– Cash
– Trucks
– Buildings
– Shoes in a shoe store
– Kites in a kite store
– Accounts Receivable
• The amount owed to you or the business
• Assets that seem like Expenses
– Prepaid Insurance for one year
The Nine Assets Successful Adult Students
• They know why they are here
• They have a strong support network.
• They believe in their ability to do the
work
• They keep their eyes on the prize, no
matter how far away it is
• They know how to advocate for
themselves
• They are grateful for the opportunity
Define Accounts Receivable
• Accounts Receivable
– An account used to record the amounts
owed by charge customers
• The business has legal claims against charge
customers
• Look for the words:

– “Sold on account”
• A/R = Holding Tank for future receipt of
cash
Define Liability
• Liability
– Debts or amounts owed to creditors
– (Probable) sacrifice of future economic
benefits
• In one word:
– Debt
Identify Liabilities
• Examples of Debts/Liabilities
– Loans (borrowing money)
– Accounts Payable account
• Buy goods/services on credit
• Receive a bill, but don’t pay until later
• Buy supplies from a store, but pay for them
later
BASIC CONCEPT
Define Accounts Payable
• Accounts Payable
– A liability account used for short-term
liabilities or charge accounts, usually due
within thirty days
• Look for the words:

– “Bought/purchased on account”
– “Bought/purchase on credit
• A/P = Holding Tank for cash the
business will pay out later
Define Owner’s Equity
• The owner’s right to or investment in the

business
• Assets – Liabilities = Owners’ Equity

• A – L = OE
Identify Owner’s Equity
• What is left over for the owner after all

the debts have been paid
– Remember: Creditors must be paid before
the owner’s are paid
• In this text book we will use the
account:
– Capital
GROUP ACTIVITY
• A = L + OE
• Assets = Liabilities + Owner’s Equity
– The equals sign means that one side must
always equal the other side
– We’ll use this equation later to determine
whether we have recorded our business
transactions correctly
Suppose the total value of the assets is

$26,000 and the business entity does not
owe any amount against the assets.
Assets = Liabilities + Owner’s Equity

$26,000 = $0 + $26,000
Suppose the total value of the assets

consists of a truck that costs $23,000.
The owner invested $11,000 in the truck
and borrowed 12,000 from the bank.

$23,000 = $12,000 + $11,000
Determine Owner’s Equity
Ms. Burns has $9,000 invested in her travel

agency, and the agency owes creditors
$2,000.
? = $2,000 + $9,000
$2,000 Liabilities
+ 9,000 Owner’s Equity
= 11,000 Assets

$11,000 = $2,000 + $9,000
Mr. Shea owns an auto lube shop. His

business has assets of $36,000 and it owes
creditors $5,000.
$36,000 = $5,000 + ?
$36,000 Assets
- 5,000 Liabilities
= 31,000 Owner’s Equity

$36,000 = $5,000 + $31,000
Mr. Stan’s insurance agency has assets of

$32,000; his investment (his equity) amounts
to $20,000.
$32,000 = ? + $20,000
$32,000 Assets
- 20,000 Owner’s Equity
= 12,000 Liabilities

$32,000 = $12,000 + $20,000
Record a group of business transactions,

in column form, involving changes in
assets, liabilities, and owner’s equity
Recording Business Transactions
We will be recording business

transactions for a company with the
following details:
Owner’s name: L.P. Arch

Business name: Arch Copy Co.
Business type: Sole Proprietorship
(one-person business)
Some Definitions
• Sole proprietorship
– A one-owner business
• Separate entity concept
– The concept by which a business is treated
as a separate economic or accounting
entity
– The business stands by itself, separate
from its owners, creditors, and customers
Some Definitions
• Accounts
– The categories under the Assets, Liabilities, and
Owner’s Equity headings
– Examples:
• Cash
• Truck
• Accounts Payable
• Capital
• Double-entry accounting
– The system by which each business transaction is
recorded in at least two accounts and the
accounting equation is kept in balance
Some Definitions
• Fair market value

– The present worth of an asset or the amount that
would be received if the asset were sold to an
outsider on the open market
• Withdrawal
– The taking of cash or other assets out of a
business by the owner for his or her own use
– Account used:
• Drawing
– Treated as a temporary decrease in owner’s
equity
Steps in Recording a Business Transaction
1. What accounts are involved?
• Cash, Parking Revenue, Etc…
2. What are the classifications of the accounts
involved?
1. A = L + OE – R + E
3. Are the accounts increased or decreased?
4. Is the equation in balance after the
transaction has been recorded?
1. A = L + OE – R + E
Remember: each business transaction must
affect at least two accounts
Recording Transactions
Assets = Liabilities + Owner's Equity

Items owned Amounts owed to creditors Owner's investment
Cash = L. P. Arch, Capital

(a) + 70,000 = + 70,000
Transaction (a): Arch deposited $70,000 in a bank

account in the name of business.

Items owned Amounts owed to creditors Owner's investment
Cash + Equip. = L. P. Arch, Capital

Prev. Bal. + 70,000 = + 70,000
(b) - 33,000 + 33,000
New Bal. 37,000 + 33,000 = 70,000
70,000 = 70,000
Transaction (b): Bought equipment, paying

cash, $33,000.
Cash + Equip. = Accounts Payable + L. P. Arch, Capital

Prev. Bal. 37,000 + 33,000 = + 70,000
(c) + 7,000 + 7,000
New Bal. 37,000 + 40,000 = 7,000 + 70,000
77,000 = 77,000
Transaction (c): Bought equipment on account

from Melton Office Supply, $7,000.
Cash + Equip. = A/P + L. P. Arch, Capital

Prev. Bal. 37,000 + 40,000 = 7,000 + 70,000
(d) - 2,000 - 2,000
New Bal. 35,000 + 40,000 = 5,000 + 70,000
75,000 = 75,000
Transaction (d): Paid Melton Office Supply, a creditor,

$2,000.
L. P. Arch,
Cash + Equip. = A/P + Capital
Prev. Bal. 35,000 + 40,000 = 5,000 + 70,000
(e) + 6,200 - 6,200
New Bal. 35,000 + 46,200 = 5,000 + 76,200
81,200 = 81,200
Transaction (e): Arch invested her own personal data
processing equipment in Arch Copy Co. having a fair
market value of $6,200.
Define and identify revenue and expense

accounts
Define Revenues
• The amounts a business earns

• Examples
– Fees earned for performing services
– Sales of merchandise
– Rent income, and interest income
• May take the form of cash, credit card
receipts, or accounts receivable (charge
accounts)
Identify Revenue Accounts
• Fees Earned for performing services

• Sales Income from selling merchandise
• Rent Income for the use of property
• Interest Income for lending money
• Credit Sales where cash will be
received at a later time
– Example: Home Depot sells lumber to a
customer and lets the customer pay later
Define Expenses
• The costs that relate to earning revenue

(the costs of doing business)
• Examples
– Wages
– Rent
– Interest
– Advertising
• May be paid in cash, immediately or at
a future time (accounts payable)
Identify Expense Accounts
• Wages Expense for labor performed

• Rent Expense for the use of property
• Interest Expense for the use of money
• Advertising Expense
• Expense incurred but not paid:
– Example: Received a bill for a newspaper ad
you took out last week
– Cash will be paid at a later time
Owner’s Equity
• Revenues and expenses are under the

umbrella of owner’s equity
• Revenue  Add to Capital account
• Expenses  Subtract from Capital

account
Define Chart of Accounts
The official list of account titles to be used to
record the transactions of a business
Chart of Accounts
Assets (100s) Owner's Equity (300s)
111 Cash 311 L. P. Arch, Capital
113 Accounts Receivable 312 L. P. Arch, Drawing
117 Prepaid Insurance
124 Equipment Revenues (400s)
411 Income from Services
Liabilities (200s) Expenses (500s)

221 Accounts Payable 511 Wages Expense
512 Rent Expense
513 Supplies Expense
514 Advertising Expense
515 Utilities Expense
Record a group of business transactions,

in column form, involving all five elements
of the fundamental accounting equation
Cash + Equip. = A/P + L. P. Arch, Capital + Revenue

Prev. Bal. 35,000 + 46,200 = 5,000 + 76,200
(f) + 2,520 + 2,520
(Income from Services)
New Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520
83,720 = 83,720
Transaction (f): Arch Copy Co. sold services for cash,

$2,520.
Cash + Equip. = A/P + L. P. Arch, Capital + Revenue +- Expenses

Prev. Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520
(g) - 700 + 700
(Rent Expense)
New Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 - 700
83,020 = 83,020
Transaction (g): Paid rent for the month, $700.
Cash + Equip. = A/P + -

L. P. Arch, Capital + Revenue + Expenses
Prev. Bal. 36,820 + 46,200 = 5,000 + 76,200 + -
2,520 + 700
(h) + 600 + 600
(Supplies Expense)
New Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300
83,020 = 83,020
Transaction (h): Arch Copy Co. bought supplies (toner

and paper) on credit. These supplies are used
immediately; therefore, they are recorded as an
expense ($600).
Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - Expenses

Prev. Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300
(I) - 360 +360
New Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300
83,020 = 83,020
Transaction (i): Arch Copy Co. paid $360 for a one-year

liability insurance policy.
Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - Expenses

Prev. Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300
(j) + 200 + 200
(Advertising Expense)
New Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500
83,020 = 83,020
Transaction (j): Arch Copy Co. received a bill for

advertising expense.
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - Expenses
Prev. Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500
(k) + 1,050 + 1,050
New Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500
84,070 = 84,070
Transaction (k): Arch Copy Co. completed a printing job

and billed Walker Company $1,050 for services
performed.
Prev. Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500
(l) - 1,800 - 1,800
New Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500
82,270 = 82,270
Transaction (l): Arch Copy Co. paid $1,800 to Melton

Office Supply, its creditor, as part payment on account
Prev. Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500
(m) - 160 + 160
(Utilities Expense)
New Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660
82,110 = 82,110
Transaction (m): Arch Copy Co. received and paid a bill

from Regional Power, Inc., for $160.
Prev. Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660
(n) - 200 - 200
New Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660
81,910 = 81,910
Transaction (n): Arch Copy Co. pays on account $200

to the City News for advertising.
Prev. Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660
(o) - 2,130 + 2,130
(Wages Expense)
New Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790
79,780 = 79,780
Transaction (o): Arch Copy Co. pays wages for a part-

time employee, $2,130.
Prev. Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790
(p) - 620 + 3,520 + 2,900
New Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790
82,680 = 82,680
Transaction (p): Arch Copy Co. buys additional

equipment from Melton Office Supply for $3,520, paying
$620 down, with the remaining $2,900 on account
Prev. Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790
(q) + 850 - 850
New Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790
82,680 = 82,680
Transaction (q): Arch Copy Co. receives $850 cash on

account from a credit customer.
Prev. Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790
(r) + 4,220 + 4,220
New Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790
86,900 = 86,900
Transaction (r): Arch Copy Co. receives revenue from

cash customers for the rest of the month, $4,220
Prev. Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790
(s) - 2,500 -2,500
(Drawing)
New Bal. 34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 - 3,790
84,400 = 84,400
Transaction (s): Arch withdraws $2,500 in cash from the

business for her personal living costs
34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 - 3,790
Left Side of Equals Sign = Right Side of Equals Sign
Cash $34,120 Accts. Pay. $ 6,700

Equip. 49,720 L. P. Arch, Capital 73,700
Ppd. Ins. 360 Revenue 7,790
Accts. Rec. 200 $88,190
$84,400 Expenses - 3,790
$84,400
A = L + OE
• Does this apply in our own everyday

lives?
• Buy a car?
• Buy a house?
What is the essence of each side?
A = L + OE
Use of Cash Source of Cash
What is the essence of each side?
A = L + OE
Demonstration Problem
• We will be recording business transactions

for a company with the following details:
Owner name: Mai Lee

Business name: Lee Attorneys
Business type: Sole proprietorship
(one-person business)

Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) +5,000 + 5,000
5,000 = 5,000
(a) Deposited $5,000 in a bank account in the

name of the business

(a) 5,000 5,000
(b) -700 +700
(Rent Expense)
Bal. 4,300 = 5,000 - 700
4,300 = 4,300
(b) Paid rent for the month, $700

(Rent Expense)

(a) 5,000 5,000
(b) -700 700
(Rent Expense)
(c) +2,000 +2,000
Bal. 4,300 + 2,000 = 2,000 + 5,000 - 700
6,300 = 6,300
(c) Bought office equipment on credit, $2,000

(a) 5,000 5,000
(b) -700 700
(Rent Expense)
(c) 2,000 2,000
(d) +3,000 +3,000
Bal. 7,300 + 2,000 = 2,000 + 5,000 + 3,000 - 700
9,300 = 9,300
(d) Sold services for cash, $3,000

(a) 5,000 5,000
(b) -700 700
(Rent Expense)
(c) 2,000 2,000
(d) 3,000 3,000
(e) +4,000 +4,000
Bal. 7,300 + 4,000 + 2,000 = 2,000 + 9,000 + 3,000 - 700
13,300 = 13,300
(e) Mai Less invested her personal law library

with a fair market value of $4,000

(a) 5,000 5,000
(b) -700 700
(Rent Expense)
(c) 2,000 2,000
(d) 3,000 3,000
(e) 4,000 4,000
(f) -1,000 -1,000
Bal. 6,300 + 4,000 + 2,000 = 2,000 + 8,000 + 3,000 - 700
12,300 = 12,300
(f) Mai Lee withdraws $1,000 cash for personal

use

(a) 5,000 5,000
(b) -700 700
(Rent Expense)
(c) 2,000 2,000
(d) 3,000 3,000
(e) 4,000 4,000
(f) -1,000 -1,000
(g) +200 +200
Bal. 6,300 + 200 + 4,000 + 2,000 = 2,200 + 8,000 + 3,000 - 700
12,500 = 12,500
(g) Purchased supplies on credit for $200

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Chapter One

Accounting Is Fun! 1-3

Accounting Is Fun! 1-4

Accounting Is Fun! 1-5

Accounting Is Fun! 1-6

1. Define and identify asset, liability, and

Accounting Is Fun! 1-7

3. Define and identify revenue and

Accounting Is Fun! 1-8

• Assets = Liabilities + Owner’s Equity

Accounting Is Fun! 1-9

Define and identify asset, liability, and

• Look for the words:

• Look for the words:

• The owner’s right to or investment in the

• Assets – Liabilities = Owners’ Equity

• What is left over for the owner after all

Suppose the total value of the assets is

Assets = Liabilities + Owner’s Equity

Suppose the total value of the assets

Assets = Liabilities + Owner’s Equity

Ms. Burns has $9,000 invested in her travel

Assets = Liabilities + Owner’s Equity

Mr. Shea owns an auto lube shop. His

Assets = Liabilities + Owner’s Equity

Mr. Stan’s insurance agency has assets of

Assets = Liabilities + Owner’s Equity

Record a group of business transactions,

We will be recording business

Owner’s name: L.P. Arch

• Fair market value

Assets = Liabilities + Owner's Equity

Cash = L. P. Arch, Capital

Transaction (a): Arch deposited $70,000 in a bank

Assets = Liabilities + Owner's Equity

Cash + Equip. = L. P. Arch, Capital

Transaction (b): Bought equipment, paying

Assets = Liabilities + Owner's Equity

Cash + Equip. = Accounts Payable + L. P. Arch, Capital

Transaction (c): Bought equipment on account

Assets = Liabilities + Owner's Equity

Cash + Equip. = A/P + L. P. Arch, Capital

Transaction (d): Paid Melton Office Supply, a creditor,

Assets = Liabilities + Owner's Equity

Define and identify revenue and expense

• The amounts a business earns

• Fees Earned for performing services

• The costs that relate to earning revenue

• Wages Expense for labor performed

• Revenues and expenses are under the

• Revenue  Add to Capital account

• Expenses  Subtract from Capital

Liabilities (200s) Expenses (500s)

Record a group of business transactions,

Assets = Liabilities + Owner's Equity

Cash + Equip. = A/P + L. P. Arch, Capital + Revenue

Transaction (f): Arch Copy Co. sold services for cash,

Assets = Liabilities + Owner's Equity

Cash + Equip. = A/P + L. P. Arch, Capital + Revenue +- Expenses

Transaction (g): Paid rent for the month, $700.

Assets = Liabilities + Owner's Equity

Cash + Equip. = A/P + -

Transaction (h): Arch Copy Co. bought supplies (toner