Ch2

The accounting equation

Assets = Liabilities + Owner’s Equity.

Own = Owe to someone + funds provided by its owners.

Assets
Something valuable that an entity owns, benefits from, or has use of, in generating
income.

Accounts receivable the amounts owing to a business from customers for invoiced
amounts.

Inventory the products or supplies of an organization on hand or in transit at any

time.
 It is for manufacturing company only.
Liabilities
Current obligation for the company arising from past transactions.

Accounts payable the amounts owed by a business to suppliers.

Owner’s Equity
The difference between assets and liabilities

The four types of transactions affect the Owner’s Equity:

INCREASE DECREASE

Investment by owners Withdrawals by owner

Owner’s Equity
revenues expenses

Investment by owners
 Are the assets put into the business by the owner.
 These investments in the business increase owner’s equity.

Withdrawals by owner
 Are withdrawals of cash or other assets by the owner for personal use.
 Drawings decrease total owner’s equity.

Revenues
 Are the gross increases in owner’s equity resulting from business activities
entered into for the purpose of earning income.
 Revenues may result from sale of merchandise, performance of services,
rental of property, or lending of money.
 Revenues usually result in an increase in assets.

Expenses
 Are the decreases in owner’s equity that result from operating the business.
 Expenses are the cost of assets consumed or services used in the process of
earning revenue.
 Examples of expenses include utility expense, rent expense, and supplies
expense.

 Assets= Liabilities + Owner’s Equity.

 Assets= Liabilities + (Owner’s investments - Owner’s withdrawals +Revenues
– Expenses ).
 Exercises

Ex: 1

Assume that a business owned assets of SR 100,000, owed creditors SR 70,000 and owed
the owner SR 30,000. The accounting equation would be:

Assets = Liabilities + Owner’s Equity

100000 = 70000 + 30000

If over a certain period the firm had a net income of 10,000 the equation would then be:

Assets = Liabilities + Owner’s Equity

110000 = 70000 + 40000

We shall call any business event that alters the amount of assets, liabilities or capital a
transaction.

Ex: 2

During the month of Moharam, Mr. Ahmed. Lawyer:

1- Invested SR 5,000 to open his law practice.

2- Bought supplies (stationary, forms, pencils, ect.) for cash, SR 300
3- Bought office equipment from al-Motlag Furniture Company on account SR 2,500.
4- Received SR 2000 in fees earned during the month.
5- Paid office rent for Moharam , 500.
6- Paid salary for part-time help, SR 200.
7- Paid SR 1,000 to Al-Motlag Furniture Company on account.
8- After taking an inventory at the end of the month, found he had used SR 200 worth of
supplies.
9- Withdrew SR 300 for personal use.
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Ex: 3

On June 1, Daleen started her Medical care service. Listed below are
the transactions for the month of June. Record the transactions
on the blank form which follows.

June 1 Invested $2,200 cash and equipment with a book value of

$3,500.
5 Received $375 for lawn care service.
7 Received $1,100 for lawn care service.
11 Purchased equipment for $2,000, paying $1,000 cash and giving
a note for $1,000 for the remainder (the Note is a liability).
15 Paid gas bill, $275.
19 Withdrew $200 cash for personal use.
21 Purchased supplies for $100 on account.
25 Paid $400 on outstanding note (see June 11 transaction).
30 Received $925 for lawn care service.
 Daleen Medical Care Service

Cash + Supplies + Equipment = Liabilities + Capital

June 1

June 5
Balanc
e

June 7
Balanc
e

June
11
Balanc
e

June
15
Balanc
e

June
19
Balanc
e

June
21
Balanc
e

June
25
Balanc
e

June
30
Balanc
e
 June 30

Ex: 4

The following transactions were engaged in during the month of

March by Dr. Al-Salem:

(1) Opened his practice by investing $10,000 in the business.

(2) Bought office equipment for $7,000 on account from Medical
Products, Inc.
(3) Paid $2,000 for various medical supplies for the office.
(4) Received $1,600 in fees earned during the first month of
operations.
(5) Paid office rent for the month, $200.
(6) Paid medical assistant salary for the month, $400.
(7) Paid Medical Products, Inc., $3,000 on account.
(8) Withdrew $500 for personal use.

Enter each transaction in the following form:

Capital Liabilitie Equipmen Supplie Cash

s t s
1
2
B
3
B
4
B
5
B
6
B
7
B
8
B
Ex: 5
Summary financial data of the Nu-look Dry Cleaning Co. for
November are presented below in transaction form.

(1) Opened a business bank account, depositing $12,000.

(2) Purchased supplies for cash. $220.
(3) Purchased dry cleaning equipment from Hill Cleaning Equipment,
Inc.,
for $3,500, paying $1,500 in cash with the balance on account.
(4) Paid rent for the month, $425.
(5) Cash sales for the month totaled $1,850.
(6) Paid salaries of $375.
(7) Paid $500 on account to Hill Cleaning Equipment, Inc.
(8) The cost of supplies used was determined to be $60.

Record the transactions and running balances in the following

form.

Assets = Liabilities + Capital

= +
+Capital Accounts Equipment +Supplies Cash
Payable
(1)
(2)
Balance
(3)
Balance
(4)
Balance
(5)
Balance
(6)
Balance
(7)
Balance
(8)
Balance