1.

01 – CONTENT NOTES

I. Accounting
A. Accounting is the planning, recording, analyzing, and interpreting of financial
information.
B. An accounting system is the process for providing financial information that
will be useful to management.

II. Accounting Equation

A. The accounting equation shows the relationship among assets, liabilities,
and owner’s equity. It is most often stated as:
Assets = Liabilities + Owner’s Equity
1. The accounting equation must be in balance.
2. The total of the amounts on the left side must always equal the total of the
amounts on the right side.
B. The values of all things owned (assets) are on the left side of the accounting
equation. The values of all claims against the assets (liabilities and equities)
(owner’s equity) are on the right side of the accounting equation. An
accounting device used to analyze transactions is called a T-account.

Assets = Liabilities + Owner’s Equity

Left Side Right Side
Debit Side Credit Side

1. An amount recorded on the left side is a debit. (Debit comes from the
Latin word debere and is abbreviated with dr.)
2. An amount recorded on the right side is a credit. (Credit comes from the
Latin word credere and is abbreviated with cr.)
3. The normal balance is the side of the account that is increased. Two
basic accounting rules about increases and decreases of account balances
are:
a. Account balances increase on the normal balance side of the account.
b. Account balances decrease on the side opposite the normal balance
side of the account.
C. Assets are on the left side of the accounting equation and have normal debit
balances (left side). Liabilities are on the right side of the accounting equation
and have normal credit balances (right side). The owner’s capital account is
on the right side of the equation and has a normal credit balance (right side).
 D. Transactions are analyzed by asking four questions:
1. What accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?

KEY TERMS

Accounting Terms T-Account Terms

 Accounting  T-account
 Accounting system  Debit
 Accounting records  Credit
 Financial statements  Normal balance
 Chart of accounts
Accounting Equation Terms
 Asset Business Terms
 Equities  Service business
 Liability  Proprietorship
 Owner’s equity
 Accounting equation
 Transaction
 Account
 Account title
 Account balance
 Capital
 Revenue
 Sale on account
 Expense
 Withdrawals

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1.01 ASSETS, LIABILITIES, AND OWNER'S EQUITY

Assets

Liabilities

Owner’s Equity
 1.01 WHAT IS ACCOUNTING ?
PLANNING, RECORDING, ANALYZING, AND INTERPRETING FINANCIAL INFORMATION

In order to do this,
you must have
some type of

Accounting System
To Provide Useful Financial Information to Manage a Business

Consisting
of

Accounting Records
To Organize Summaries of a Business’s Financial Activities

You will use these

to create

Financial Statements

Sole A business Service A business

Proprietorship owned by Business that
one person performs an
activity for a
fee

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 1.01 Key Terms

Term Definition
Accounting Terms
Accounting The planning, recording, analyzing, and interpreting of
financial information

The process for providing financial information that will

Accounting system be useful to management

Organized summaries of a business’s financial activities

Accounting records
Reports that summarize the financial condition and
Financial statements operations of a business

Accounting Equation Terms

Asset Anything of value that is owned

Equities The financial rights to the assets of a business

Liability An amount owed by a business

Owner's equity The amount remaining after the value of all liabilities is
subtracted from the value of all assets
Shows the relationship among assets, liabilities, and
Accounting equation owner’s equity. It is most often stated as:
Assets = Liabilities + Owner’s Equity
A business activity that changes assets, liabilities, or
Transaction
owner’s equity

Account A record summarizing all the information pertaining to a

single item in the accounting equation
Account title The name given to an account
Account balance The amount in an account

Capital The account used to summarize the owner’s equity in a

business

Revenue An increase in owner’s equity resulting from the

operation of a business
Sale on account A sale for which cash will be received at a later date

Expense A decrease in the owner’s equity resulting from the operation

of a business

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 Term Definition
Withdrawals Assets taken out of a business for the owner’s personal use

Term Definition
T-Account Terms
T-account An accounting device used to analyze transactions
Debit An amount recorded on the left side of a T-account
Credit An amount recorded on the right side of a T-account
Normal balance The side of the account that is increased
Chart of accounts A list of accounts used by a business
Business Terms
Service business A business that performs an activity for a fee
Proprietorship A business owned and controlled by one owner

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1.01 The Accounting Equation

Assets
= Liabilities
++ Owner’s Equity

Left Side Amount Right Side Amount

Debit Credit

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1.01 PowerPoint Notes
Completing the Accounting Equation

Transaction Effect on the Accounting Equation

Owner invests cash in the business Assets Cash is increased.

Liabilities

Owner's Equity Owner's Equity is increased.

Paid cash for supplies or equipment Assets Cash is decreased.

Supplies or Equipment is increased.

Liabilities

Owner's Equity

Bought supplies or equipment on Assets Supplies or Equipment is increased.

account
Liabilities Accounts Payable is increased.

Owner’s Equity

.
Received cash from sales Assets Cash is increased.

Liabilities

Owner's Equity Owner's Equity is increased.

(revenue)

Paid cash for rent Assets Cash is decreased.

Liabilities

Owner's Equity Owner's Equity is decreased.

(expense)

Received cash on account Assets Cash is increased.

Accounts Receivable Accounts Receivable is
decreased.
Liabilities

Owner's Equity

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