Trial Balance

A record prepared at any moment in time to prove the accuracy of the ledger. If the totals of the debit and credit balances in the individual ledger accounts agree, the ledger is said to be in balance.

In preparing trial balance, all the accounts from the ledger post to or consist of a listing of accounts balances in two columns labeled debit and credit. Make sure the debit account equal to credit account.

There are four steps to prepare a trial balance:

1. Determine the balance of each account in the ledger
2. List the accounts and their balances with the debit balances in one column and the credit balance in another.
3. Total the debit balances and then total the credit balances.
4. Compare the sums of the debit and credit balances to see if they are equal.

Ledger

A book of secondary or final entry, containing individual accounts. The term "ledger account" refers to an individual account in the ledger. A ledger may be bound book, a loose-leaf-type book, or  computer printout.

Chart of accounts - is the official list of the ledger accounts in which transactions of a business are to be recorded.

The accountants prepare the list of the chart of accounts, arrange according to the preparation of balance sheet accounts, statement of owners equity, followed by the income statements accounts.

Example below:

Balance Sheet Accounts

Assets  (100-199)
100 Cash
101 Bank of America Checking
111 Accounts Receivable
113 Supplies
114 Prepaid Insurance
121 Equipment

Liabilities (200-299)
201 Accounts Payable
202 Notes Payable

Statement of Owner's Equity Accounts

Owner's Equity 300-399)
311 Shehla, Capital
312 Shehla, Withdrawal

Income Statement Accounts

Revenue (400-499)
411 Income from Services

Expenses (500-599)
500 Wages Expense
502 Rent Expense
503 Advertising Expense
504 Utilities Expense

Example: The Journal Entry is

Date    Description                        Debit                Credit
2013
Jan. 1  Cash ................................$50,000
             Shehgarlynn, Capital...............................$50,000
               To record the original investment of Shehla.  

Posting to the ledger accounts using T-Accounts

     Cash                                    
Debit    Credit
$50,000

Total balance of $50,000 on debit side

Shehgarlynn, Capital
Debit             Credit
                    $50,000

Total balance of $50,000 on credit side.

Journal

A book of original or first entry. The basic two column journal provides for entering business transaction are recorded, and provision is made for adequate explanation.

Journalizing = The process of recording a business transaction in a journal.

Double-Entry Accounting

A method of accounting in which, for every debit entry, there must be a corresponding credit entry of the same amount. Every business transaction must be represented by at least two changes.

The Rule of Double-Entry Accounting:

• We have learned that every business transaction involves at least two changes. 
• The change must cause the accounting equation to maintain its equality.
• For every debit entry, there must be a corresponding credit entry of the same amount.

Accounts

Accounts - An individual record of specific items that a business owns (assets) and owe (liabilities), as well as a recognition of ownership (capital)

Where to Record Business Transaction

1. Accounts 
2. Double-Entry Accounting
3. Journal
4. Ledger
5. Trial Balance

In recording business transaction:

1. Analyze what account are involve.
2. Classify the account involve. (Accounting Equation)
3. Are the account increase or decrease
4. Record the transaction

To test your understanding of the recording procedure, describe the nature of the transactions that have taken place. (see the accounting equation)

Example:

Januanry 1, 2013, Shegarlynn's invest $50,000 cash in the business.

Note: The account involve are investment of Shehgarlynn $50,000, which is cash.

Accounting Equation
Assets = Liabilities + Owner's Equity

Assets = Cash  (Increase)
Owner's Equity = Shehgarlynn, Capital (Increase)

The Journal Entry of the above example:

Date    Description                        Debit                Credit
2013
Jan. 1  Cash ................................$50,000
             Shehgarlynn, Capital...............................$50,000
               To record the original investment of Shehla.                      

Note: Remember always record the date first, the description, debit part, and credit part of the entry.

Trial Balance

The following are the account of Shehgarlynn Law firm for the first quarter of business operation:

Cash ....................................$1,000
Checking Account................24,150
Supplies.....................................650
Prepaid Rent...........................4,800
Office Furniture......................3,500
Office Equipment...................4,000
Accounts Payable....................1,950
Unearned Revenue...............10,000
Shehgarlynn, Capital.............21,500
Shehgarlynn, Drawing............... 800
Consulting Fees ......................8,900
Rent Expense............................400
Advertising Expense..................200
Supplies Expense ...................2,100
Utilities Expense.......................400
Miscellaneous Expense..............350

Prepare the following:

1. Trial Balance
2. Income Statement
3. Statement of Owner's Equity
4. Balance Sheet (Report Form)

Test I - Types of Assets

A. Prepare a list of (10) ten assets that a business organization would own.

1. ____________________
2. ____________________
3. ____________________
4. ____________________
5. ____________________
6. ____________________
7. ____________________
8. ____________________
9. ____________________
10. ____________________

B. Test your ability to assign specific assets to various categories.Below are (20) twenty specific assets:

1. Adding Machine                                    2. Truck

3. Petty Cash                                               4. Desk

5. Cash in Bank                                           6. Chairs

7. Typing Paper                                         8. Computer

9. Automobile                                          10. Pencils

11.Traveler's Check                               12. Pens

13. Currency                                             14. Light Bulbs

15. USB                                                       16. Typewriter

17 Printer Ink                                           18. Printer

19. Ribbon of the typewriter              20. Fax Machine

Place each of these assets under appropriate specific asset category heading in the following form:

Cash         Furniture & Fixture   Delivery Equipt     Office Supplies   Office Equipt
_______   ___________   ___________     ____________  _____________
_______   ___________    ___________    ____________  _____________
_______   ___________   ____________   ____________  _____________
_______   ___________   ____________   ____________  _____________
_______   ___________   ____________   ____________  _____________
_______   ___________   ____________   ____________  _____________

Tangible Assets

Tangible assets - Is one that can be readily seen, and possibly touched.

Example are:

1. Current assets
2. Investments
3. Property, Plant, and Equipment
4. Furniture and Fixture
5. Office Equipment

Intangible Assets

Are usually of a long-term nature and have no physical qualities, but has a value based on rights or privileges belonging to the owners of the organization.

Example of these assets are:

1. Patents
2. Goodwill
3. Trademark
4. Copyrights, and
5. Franchises

Property, Plant, and Equipment

Assets that have a useful life of more than 1 year and are used in the continuing operations of the organization.

Property - Any assets, including cash, title to which is ordinarily transferable between persons.

Plant Assets - Tangible non-current assets that are used in the operation of the business.
Examples are:

1. Land
2. Building
3. Machinery 
4. Employee parking lot

Equipment - A fixed-assets units, usually movable, accessory or supplemental to such larger items as buildings and structures; Examples are:

1. Lighting fixture
2. Lockers
3. Communication devices
4. Air conditioners.

Machinery and fixtures - Are not generally classified as equipment, although they fall under the definition. Example are:

1. Delivery equipment
2. Office equipment
3. Factory equipment

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Investments

• An expenditure to acquire property - real or personal, tangible or intangible--yielding income or services.
• Are generally of a long-term nature, are not used in the normal operations of the organization and are not expected to be converted to cash within the year.

Example of investment are:

1. Stocks
2. Bonds
3. Deposit Certificate

Classifying Liabilities

Liabilities are classified in a similar manner.

Liabilities are considered to be current liabilities if the obligation is to be settled within 1 year or with in the current accounting period.

These debts are usually settled with the payment of current assets.
Examples of current liabilities are the following:

1. Accounts Payable
2. Taxes Payable
3. Salaries Payable
4. Water and Power Payable
5. Notes Payable (if the obligation is due with in 1 year)

Following current liabilities on the balance sheet are long-term liabilities, which are usually payable in more than a year.

Examples of long-term liabilities are:

1. Bonds Payable
2. Mortgages Payable

In the year in which a long-term liability becomes payable, it is usually converted to a current liability ( appearing under the current liability heading of the balance sheet).

Classifying Assets

Assets as we discussed before, may be further grouped according to the degree of liquidity or the expected conversion to cash or the time it takes to use up the asset. For analytical purposes, assets are classified as follows:

1. Current Assets
2. Investments
3. Property, Plant, and Equipment
4. Intangible Assets.

Balance Sheet

The balance sheet shows the financial position of a business on a specific date. It represents a detailed presentation of the accounting equation.

Basic Accounting Equation: 

                  Assets  =  Liabilities  + Owner's Equity (Capital)

Expanded Accounting Equation

      Assets = Liabilities  +  (Capital - Withdrawal) + (Revenue  -  Expenses)

Note: You should Remember the following:

• The balance sheet, which consists of a detailed listing of the various assets, liabilities, and proprietor's capital on a specific date, shows the financial position and conditions of the organization at that moment in time.
• The balance sheet relies on the preparation of the statement of capital  for the determination of the new proprietor's capital balance.
• The statement of capital in turn relies on the income statement preparation for the determination of the change in capital for the particular period.
• Because of these relationships, the order of preparation of the financial statements never change.

There are two forms that the balance sheet takes:

1. Report form
2. Account form

Although both forms provide identical information their appearance differs according to the use to be made of the forms by the accountant.

Test VI Effects of Debits and Credits in Transactions

On the lines provided, indicate with a " + " (for Increase) or a " - "  (for Decrease), the effect the debit or credit has on each account.

Example: The business received cash from a customer paying on their account.
Answer:     Account                                                          Debit             Credit
           Cash............................................................  +      
               Account Receivable....................................................     -   

1). The owner paid cash for some supplies.
          Supplies ......................................................_____
             Cash ........................................................................._____

2). The owner returned some equipment for credit.
          Accounts Payable ....................................._____
              Equipment ............................................................  _____

3). The owner invested some personal cash in the business.
          Cash ..................................................... _____
              Capital ................................................................._____

4). The owner withdrew cash from the business for personal use.
          Drawing ..............................................   _____
              Cash .................................................................    _____

5). The owner performed services for a customer, payment to be received next month.
          Accounts Receivable ............................   _____
              Fees Earned ....................................................    _____

6). The owner pays salary for the staff.
          Salaries Expense  ...................................  _____
              Cash .............................................................       _____

7). The owner makes cash withdrawal.
          Withdrawal .........................................   _____
              Cash  ..............................................................     _____

8). The owner paid the telephone bill.
          Telephone or utilities Expense................. _____
              Cash ...............................................................      _____

9). The owner paid to a creditor.
          Accounts Payable  .................................  _____
              Cash  ...........................................................        _____

10. The owner pays rent for office space.
          Rent Expense .........................................  _____
              Cash  ...........................................................         _____

Test V Analyzing the Transaction

Analyze the following transactions to determine which accounts are involved, whether they will be increased or decreased, and in which account group they will belong, use the expanded accounting equation:
Assets = Liabilities + Owner's Equity - Drawing + Revenue - Expenses

Note: Use a (+) for increase and a (-) for decrease.

Example: The owner invested in his business.

Answer : + Assets (Cash)                + Owner's Equity (Capital)

1. Bought new equipment on account.
2. Received cash for services rendered.
3. The business performed services on account.
4. Withdrew cash for personal use.
5. Paid secretary salary.
6. Paid for supplies purchased.
7. Billed customers for services rendered.
8. Received payment from a customer paying on his account.
9. The supplies were used up. Record them as an expense now.
10. Borrowed money from the bank
11. Purchased on account (charged) some office equipment.
12. Paid for utilities expense.
13. Paid the bank the money we previously borrowed.
14. Paid the telephone bill that just came in.
15. Made a partial payment to a creditor.
16. Took cash out of the business to pay for a personal bill.
17. Recorded revenue earned, but not collected yet.
18. Recorded expenses incurred, but not collected yet.
19.Received cash for the return of same equipment that was defective.
20. Received payment from an Account Receivable.

Test IV Classify the Normal balance, Decrease, and Increase account.

 Fill in the blank enter D = Debit  or  C = Credit 
A. What is the Normal Balance for the following accounts?
_____ 1. Rent Expense                          _____ 11. Land
_____ 2. Capital                                       _____ 12. Drawing
_____ 3. Interest Payable                    _____ 13. Property Taxes Payable
_____ 4. Fees Earned                            _____ 14. Interest Receivable
_____ 5. Notes Payable                        _____ 15. Accounts Payable
_____ 6. Unearned Income                 _____ 16. Equipment
_____ 7. Office Furniture                     _____ 17. Prepaid Insurance
_____ 8. Advertising Expense            _____ 18. Utilities Expense
_____ 9. Wages Payable                       _____ 19. Admissions Income
_____10. Film Rental Expense          _____ 20. Additional Investment

B. What would it take to Decrease the following accounts?

_____ 21. Cash                                        _____ 26. Capital
_____ 22. Wages Payable                   _____ 27. Subscription Revenue
_____ 23. Building                                 _____ 28. Interest Income
_____ 24. Drawing                                _____ 29. Accounts Receivable
_____ 25. Office Equipment              _____ 30. Office Supplies Expense  

C. What would it take to Increase the following accounts?

_____ 31. Capital                                  _____ 36. Supplies
_____ 32. Petty Cash                           _____ 37. Drawing
_____ 33. Salaries Payable                _____ 38. Rent Expense
_____ 34. Rent Income                      _____ 39. Office Equipment
_____ 35. Taxes Payable                   _____ 40. Notes Payable

Test VII Classify the Account

Classify each of the following as element of the accounting equation using the following abbreviations:
A = Assets; L = Liabilities; OE = Owner's Equity; R = Revenue; E = Expenses
Example:    R     Income (form services). answer - Revenue

_____ 1. Accounts Receivable               _____ 11. Supplies
_____ 2. Capital                                           _____ 12. Accounts Payable
_____ 3. Salaries Payable                        _____ 13. Drawing
_____ 4. Prepaid Rent                              _____ 14. Building
_____ 5. Cash                                               _____ 15. Notes Payable
_____ 6. Equipment                                  _____ 16. Interest Payable
_____ 7. Unearned Revenue                 _____ 17. Taxes Payable
_____ 8. Land                                              _____ 18. Rent Income
_____ 9. Rent Expense                            _____ 19. Telephone Bills
_____10. Salaries Expense                    _____ 20. Interest Receivable    

The Statement of Owner's Equity (Capital Statement)

• The proprietorship's capital account represents his or her ownership in the assets of the business.
• Part of the earlier discussion centered around the fact that whatever net income the business earns also belongs to the owner.
• The owner has the right either to withdraw the profits that the business earns or to reinvest the income in the business.
• Because some information used in the statement of capital is prepared after the income statement.
• Ask three question (same income statement)

     Example: Statement of Owners Equity

                                                        Shehgarlynn Laundry

                                                Statement of Owner's Equity

                                           For the Year Ended December  31, 2007

Shehgarlynn, Beginning Capital... Jan. 1, 200.........................................25,300

Add: Invesment........................................35,750

           Net Income .....................................45,490         81,240

Less: Shehgarlynn, Withdrawal.................                       10,650 

        Net Increase in Capital..................................................................... 70,590

Shehgarlynn, (Ending) Capital, Dec. 31, 2007....................................  $95,890

Note: Changes in the proprietor's capital from the beginning of the accounting period to end  of that periods.

1. A permanent increase in the proprietor's investment in the business. (addition to capital). 
2. A permanent decrease in the proprietor's investment in the business, (subtraction from capital.)
3. The proprietor's withdrawal of assets from the business, usually in anticipation of profits (subtraction from capital).
4. The recognition of net income for the period (addition to capital).
5. The recognition of a net loss for the period (subtraction from capital)

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What is Income Statement?

Income Statement - Is a report that present revenue, expenses, and net income or net loss for a business for a period of time.

It is divided into two parts.

1. Heading 
2. Body

1. Heading - Asks three questions.

1. WHOSE business is it?
2. WHAT statement is being prepared?
3. WHEN is it being prepared?

2. Body - Lists revenue and expenses.

A comparison of these two items will show either net income or net loss. 

When total revenue exceeds total expenses, the excess represents the income. 

When the total expenses exceed the total revenue, the difference represents a net loss.

Note: The income statement compares the revenue earned for as period of time with the expenses incurred for the same period.

You should remember 

• If the revenue exceeds the expenses, the excess is known as net income.
• If total expenses are greater than revenue, the resulting difference is known as a net loss.

Example: Income Statement

                                           Shehgarlynn Laundry

                                             Income Statement

                                  For the year Ended December 31, 2007

Revenue:

    Income from services......................................................................................$74,000

Expenses:

   Repair expenses.............................................$2,350

   Salaries .........................................................14,500

   Dept. Water and Power...................................5,350

   Gas Company................................................. 2,750

   Miscellaneous Expense ...................................3,560

Total Expenses.....................................................................................................28,510

Net Income .........................................................................................                $45,490

Two Types Of Recording The Business

1. Accrual Accounting - Expenses are recorded when incurred and revenue is recorded when earned. Date of receipt or date of payment of cash does not determine the period in which revenue or expense shall be recorded under the accrual method of accounting.
2. Cash Accounting - Some small business use a cash basis for keeping their books. This means that expenses are recorded when paid and revenue is recorded when received.

Adjusting Entries - Are made to update ledger accounts at the end of a fiscal period. They are usually recorded first on the accountant's worksheet and later recorded in the journal

      Before closing the books for the period

• Any expenses have been recorded but not yet incurred.
• Any expenses were incurred but not yet recorded
• Any revenues have been recorded but were not yet earned (Unearned Revenue)
• Any revenues were earned but not yet recorded.

Note: If any of the above four conditions is found, you will make an adjusting entry to record (accrue) unrecognized revenues and expenses that belong in later periods. 

Adjusting Entries

1. Depreciation
2. Daily payroll accrual of salaries
3. Rental Income received but not yet earned
4. Supplies recognized as an expense that has not been used up.

Test III Types of Assets

From the following list of items, indicate by checking the appropriate box which items are or not assets, and write what type of assets are they?

      Item                                             Yes         No                            Types of Assets

Examples
Log book                                                  /            ______                       Office Supplies

1. Automobile                          _____          _____                      ______________
2. Apartment (rented)           _____         _____                     ______________
3. Table                                      _____         _____                      ______________
4. Typewriter                          _____         _____                      ______________
5. Shopping list                       _____         _____                      ______________
6. Money                                   _____         _____                      ______________
7. Cash in Bank                          ____         _____                       ______________
8. Pens                                       _____        _____                       _______________
9. Truck                                     _____        _____                       _______________
10. Computer                             _____       _____                       _______________
11. Stationery                             _____       _____                       _______________
12. Coins                                      _____       _____                        _______________
13. Light bulbs                            ____       _____                        _______________
14. Adding Machine                 ____        _____                       _______________
15. Software Program              _____       _____                      _______________
16. Pencils                                     _____      _____                      _______________
17. Petty Cash                                _____     _____                      _______________
18. Car                                           _____     ______                      _______________
19. Building  (office)                   _____     ______                      _______________
20. Printer                                     ______    ______                       _______________                     

Test II Accounting Theory

A.  Answer the following blank provided:

1. The accounting equation is_______________ = _____________  +  ________________
2. Items owned by a business that have money value are known as _____________________
3. _____________ The process of recording the transactions in term of money.
4. Money owed to an outsider is a ____________________
5. The difference between assets and liabilities is ___________________
6. An investment in the business increases _________________ and ___________________
7. To purchase "on account" is to create a  _______________________
8. When the word "paid" occurs, it means a deduction of _______________
9. Income increases net assets and also __________________________
10. A withdrawal of cash reduces cash and _____________________

B. Differentiate between Accountant, and Bookkeeper

  ___________________________________________________________

 ____________________________________________________________

 ____________________________________________________________

 ____________________________________________________________

 ____________________________________________________________

C. What is Revenue, Expenses, and Profit? Explain in your own understanding.

 _____________________________________________________________

 _____________________________________________________________

 _____________________________________________________________

 _____________________________________________________________

 _____________________________________________________________

D. Explain between Capital, and Withdrawal? Liabilities VS Assets?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________

Test I Accounting Equation

Fill the following blank to correspond the correct amount:

                       Assets                       =              Liabilities        +          Owner's Equity
Example         $100,000                                    $ 50,000                          $  50,000

1.     $ 50,000                                    _______                            25,000
2.    _______                                       35,500                              27,550
3.        94,000                                    _______                               4,400
4.          7,200                                         2,800                             ______
5.    _______                                         2,800                                7,200
6.          7,200                                    _______                               4,400
7.        18,000                                    _______                               6,000
8.    _______                                       78,900                              15,000
9.        17,500                                    _______                               7,950
10.    _______                                       35,500                               55,775
11.        78,950                                       25,750                              ______
12.        87,000                                       12,500                              ______
13.        75,950                                       36,255                              ______
14.     _______                                      55,890                               79,780
15.      150,890                                      95,750                               ______
16.     _______                                      71,250                               15,895
17.          7,875                                     ______                                 1,785
18.        55,950                                     ______                               25,890
19.     _______                                     89,875                                16,788
20.       33,789                                        13,955                               ______     

What is Interim Reports?

Interim Reports - is also known as financial statement. An organizations may prepare financial statements for period of time that are less than the accounting periods.

An interim statement is prepared for a period of time other than a fiscal year or calendar year.

Examples of interim statements are statement prepared for 6 months, 3 months, or even monthly periods. Regardless of the periods of time covered by the individual financial statements.

The accountant maybe called to prepare various statements to satisfy the needs of government (federal, state, and local) as well as other interested parties.

What are Financial Statement?

Financial Statements - are prepared at least once a year. This is known as the accounting period.
An accounting period may follow the calendar, in which case it begins on January 1 and end on December 31 of the same year.

The business is then said to have a calendar year accounting period.

Any business that has an accounting period consisting of 12 months other than a calendar year is generally known as a fiscal-year accounting period.

Financial Statement is also known as Interim Reports.

Basically three financial reports are prepared:

1. Income Statement - A financial statement that presents revenue and expenses and the net income or loss for a specific period of time.
2. Statement of Owner's Equity (Capital Statement) - A financial statement that shows the change in the value of the ownership in a business over a period of time. The change in capital is due to income or loss and withdrawals by the owner over a period of time.
3. Balance Sheet - A financial that shows the financial position of a business at a particular moment in time a detailed presentation of the assets, liabilities, and owner's equity. Actually, it is a detailed accounting equation, in which the total value of assets is equal to the liabilities plus proprietor' capital.

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What is Revenue, Expenses, and Profit?

Every business exists primarily to earn a profit. This profit is realized through revenue earned by an organization as a result of the sale of a service or product by that business.

Revenues - Are the amounts earned by a business. Examples of revenues are fees earned for performing services, income from selling merchandise, rent income for providing the use of property, and interest income for lending money.

Revenues - May be in the form of Cash and Credit Card Receipts like those from VISA and MASTER CARD.

Revenue - May also result from credit sales to charge customers, in which case cash will be received at a later time.

Recording Revenue

If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $550 and resulting increase in proprietor's capital of $550. Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable). The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.

Expenses - Are the costs that relate to the earning of revenue (or the costs of doing business). Examples of expenses are wages expenses for labor performed, rent expense for the use of various media (for example, newspaper, radio, and direct mail).

Expenses - Maybe paid in cash when incurred (that is, immediately) or at a later time.

Expenses - To be paid at a later time involve.

Recording Expenses

Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.

Profit - An excess of revenue over expenses.

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How Revenue and Expenses Affect Capital?

Revenue and Expenses = directly affect owner's equity.
If a business earns revenue, there is an increase in owner's equity.
If a business incurs or pays expenses, there is a decrease in owner's equity.

For the present, think of it this way: if the company makes money, the owner's equity is increased. On the other hand, if the company has to pay out money for the costs of doing business, then the owner's equity is decreased.

Revenues and expenses fall under the umbrella of owner's equity:

1. revenue increase owner's equity;
2. expenses decrease owner's equity.

Recording Revenue

If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $1,550 and resulting increase in proprietor's capital of $1,550.
Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable).

The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.


Recording Expenses

Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.
If the company pay rent of $500, it decrease in capital.

The effects of the accounting equation will decrease in owners equity.

Types of Liabilities

Liabilities - Debts, amounts owed to creditors

1. Current Liabilities - Liabilities that will be paid with current assets within one year or one operating cycle, whichever is longer.

Accounts Payable - Amounts owed creditors that result from the purchased of goods or services on account.

Notes Payable - Written promises in the hands of the makers, that serve as evidence of debts. If due within one year or one operating cycle, whichever is longer.

Interest Rate Payable - A percentage of the principal that is paid for the use of money borrowed.

Interest - Money paid for the use or borrowing of money.

Unearned Revenue - Advance payment for services that still must be performed. Unearned revenue represents a liability or obligation of the company receiving the payment for a service not yet rendered.

2. Non Current Liabilities - In general liabilities that have a due date more than a year beyond the balance sheet date or beyond one operating cycle, whichever is longer, are classified as non current source is considered non current, whatever the due date. There are several accounts that are classified as noncurrent liabilities, such as mortgages payable, Bonds Payable, Long-term Notes Payable.

Owners Equity

Owners Equity - represents the amount owed to the owners by the company. It is calculated by subtracting Liabilities from each side of the accounting operation. Owners Equity also represents the net asset of the company.

Ownership - Is the exclusive right to posses, use, enjoy, and dispose of property.

Equity - Is the owners' contribution to the business. It is represents the noncurrent obligations of the entity to the owners,. Because equity equals the amount of assets remaining after subtracting liabilities, equity is sometimes called net assets. (The term 'net' indicates that at least one amount has been subtracted from another to reach this final amount.) Equity comes from two primary sources investments by owners and earnings. An unincorporated business (sole proprietorship or partnership) will be illustrated first. Equity is equal to the owners' investments plus net income, less any withdrawals and net losses.

Capital - The owners' current investment, or equity, in the assets of a business.

Drawing Account - A temporary capital account, set in the name of the sole proprietor or a partner, from which he or she can withdraw money or other assets in anticipation of profit.

Accounting Equation

ASSETS = LIABILITIES + OWNER'S EQUITY

Assets - Properties (Resources) of value owned by a business.

Liabilities - Debts, amounts owed to creditor

Ownership - Is the exclusive right to posses, use, enjoy, and dispose or property.

Equity - Is the owner's contributions to the business.
Equity represents the noncurrent obligations of the entity to the owners. Because equity equals the amount of assets remaining after subtracting liabilities.
Equity is sometimes called net assets. (the term "net" indicates that at least one amount has been subtracted from another to reach this final amount).

Fixed Assets

Fixed Assets: An asset that has an expected useful life of 1 year or more. Fixed assets are also referred to as "plant assets" or "property, plant and equipment."

Property, Plant, and Equipment Assets - That have a useful life of more than 1 year and are used in the continuing operations of the organization.

Property - Which a person owns; possession; such as Land, or Land and Building.

Plant - The machinery, etc., used in an industrial process, etc.: The farm has its own lighting. (ex. generator)

Equipment (Office) - Such as typewriter, computer, fax machine, Xerox. etc.

Furniture and Fixtures - Such as desk, chair, cabinet, chair, etc.

Automobile Equipment - Such as car, truck, for transportation.

Currents Assets

Current Assets: Are cash and non cash assets that are readily converted to cash and are available to pay current liabilities, or non cash assets that are consumed in operations within one year or the operating cycle, whichever is longer. There are several traditional accounts that are classified as current assets on the balance sheet.

CASH - An asset consisting of coins, bills, money orders, Checks, Certificates of deposit, or treasury bills

Fixed Deposits Receipts - For certain periods - 1 year.

Treasury Bills - Issued by the government.

Notes Receivable - Written promises in the hands of the creditors, that serve as evidence of debts

Accounts Receivable - A current asset for which an oral promise to pay, made by the customer, serve as evidence. Accounts used to record the amounts owed by charge customers (legal claims against charge customer).

Note: performed services or sales item.

Merchandise Inventory - Represents the value of goods on hand, either at the beginning or end of the accounting period.

Accounting Period - The period of time, no more than 1 year, covered by the three financial statements.

Supplies - One type of asset acquired by a firm; has much shorter life than equipment. Such as pencil, stationery, etc.

Prepaid Rent - An asset account an item that normally is considered to be an expense but, because it is paid in advance, is classified as an asset. When the value of the asset has been used up, an adjusting entry will convert this prepaid expense (asset) to an actual expense. Such as insurance policies and rent paid in advance.

Types of Assets

Assets - Those things that are owned by any business organization.

In order for an item to be considered an asset, it must meet two requirements:

1. It must be owned by the organization, and
2. It must have money value.

Money Value - Exist if a buyer is willing to pay money to a seller for the property.

 Types of Assets

1. Current Assets
2. Fixed Assets

Summary of Transactions

Summarizing each individual ledger account and listing these accounts and their balances to test for accuracy in recording the transactions.
1. Name of the company
2. Title
3. Date
4. Account Name (In order - Chart of Account)
5. Two Column Debit - Credit

CHART OF ACCOUNTS
A numbering system of accounts that list account titles and accounts numbers to be used by a company.
Before recording transactions for new business, the accountant must first think of all the possible types of transactions that the company will carry out. Based on this variety of possible transactions, the company's accountant makes a list of account titles to be use to record the company's transactions.
Chart of Account - Is the official list of the ledger accounts in which transactions of a business are to be recorded. Assets are listed, Liabilities, Owners Equity, Revenue, and Expenses.

Recording Business Transaction

STEPS IN THE ACCOUNTING PROCESS
1. Record the transactions of a business in a JOURNAL book of original entry - the day - by day record of the transactions of a firm). Entry should be based on some source document or evidence that a transaction has occurred, such as an invoice, a receipt, or a check.
2. Post entries to the accounts in the LEDGER. Transfer the amounts from the JOURNAL to the Debit or Credit column of the specified accounts in the LEDGER. Use a cross reference system. Accounts are placed in the LEDGER according to the account numbers assigned to them in the CHART OF ACCOUNT.
3. Prepare a TRIAL BALANCE. Record the balances of the LEDGER accounts in the appropriate Debit or Credit column of the Trial balances form. Prove that the total of the debit balances equals the total of the credit balances.

RECORDING BUSINESS TRANSACTION

To repeat Business transactions are events that have a direct effect on the operations of an economic unit or enterprise and are expressed in terms of money. Each business transaction must be recorded in the accounting records. As one records business transactions, one has to change the amounts listed under the headings Assets, Liabilities, and Owners Equity. However, the total of one side of the fundamental accounting equation should always equal the total of the other side.

The Five Classifications:

Accounts Category           Normal Balance         Increase          Decrease
1. ASSETS                           DEBIT                          DEBIT               CREDIT
2. LIABILITIES                      CREDIT                       CREDIT             DEBIT 
3. OWNER'S EQUITY
    CAPITAL                          CREDIT                       CREDIT             DEBIT
    WITHDRAWALS             DEBIT                          DEBIT                CREDIT
4. REVENUE                       CREDIT                       CREDIT             DEBIT
5. EXPENSES                     DEBIT                          DEBIT                CREDIT 

Steps in Analyzing Transaction

1. Read the transaction to understand what is happening and how it affects the business. Example, the business has more Revenue, or has more Expenses, or has more Cash, or Owes less to Creditors.
2. Identify the accounts involved, and decide whether the accounts are increased or decrease. Look for Cash first; you will quickly recognize if Cash is coming in or going out.
3. Decide on the Classifications of the accounts involved. (for Example, Equipment is something the business owes, and it's a liability; Rent is an Expense.
4. After recording the transaction, make sure the accounting equation is in balance.

What is Accounting, Accountant, Bookkeeper, and Computer

ACCOUNTING

Accounting - Is the process of Analyzing, Classifying, Recording, Summarizing and Interpreting business transaction in financial or monetary terms.

ACCOUNTANT

Accountant - Takes that information and prepares the financial reports that are used to analyze the company's financial position.

BOOKKEEPER

Bookkeeper - An individual who earns a living by recording the financial activities of a business and who is concerned with the techniques involving the recording of the transactions.

COMPUTER

Computer - Is taking over the acccounting's job of completing financial reports. It is important to understand that the computer is only a tool that is doing the routine bookkeeping operations that previously took days or months to complete.

What are Revenue, Expenses and Profit?

Every business exists primarily to earn a profit. This profit is realized through revenue earned by an organization as a result of the sale of a service or product by that business.

Revenues - Are the amounts earned by a business. Examples of revenues are fees earned for performing services, income from selling merchandise, rent income for providing the use of property, and interest income for lending money.

Revenues - May be in the form of Cash and Credit Card Receipts like those from VISA and MASTER CARD.

Revenue - May also result from credit sales to charge customers, in which case cash will be received at a later time.

Recording Revenue
If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $550 and resulting increase in proprietor's capital of $550. Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable). The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.

Expenses - Are the costs that relate to the earning of revenue (or the costs of doing business). Examples of expenses are wages expenses for labor performed, rent expense for the use of various media (for example, newspaper, radio, and direct mail).

Expenses - Maybe paid in cash when incurred (that is, immediately) or at a later time.

Expenses - To be paid at a later time involve.

Recording Expenses
Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.

Profit - An excess of revenue over expenses.

Welcome

Welcome to my site!
Online tutorial class welcomes you to join our online forum, feel free to browse around and if you have any further question, suggestion, or comments, please don't hesitate to contact me.

This site provide a basic understanding of accounting, and teach you how to Journalize the transaction, posting to the Ledger, preparing the Trial Balance, and Financial Statement of the business.

This site was created and is maintained by me, where you'll find the accounting information and example to practice.

I dedicate this site to Mr David Eno, who inspired me to start this accounting blog.



Amina-Akhtar