What is Business:

All of the activities necessary to provide the members of an economic system with goods and
services.

The Nature of Business Activity

Businesses engage in three types of activities:
i) financing,
ii) investing, and
iii) operating.

Financing is necessary to start a business, and funds are obtained from both stockholders and
creditors. These funds are invested in the various assets needed to run a business. Once funds
are obtained and investments made in productive assets, a business begins operations, which
may consist of providing goods or services or both.
Define the terms assets, liabilities, and Owners’ equity.

Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more
simply, liabilities are existing debts and obligations. Owners’ equity is the ownership claim on
net assets.

Which of these items are liabilities of ABC Cleaning Service?

(a) Cash. (b) Dividends.
(c) Accounts payable. (d) Accounts receivable.
(e) Supplies. (f) Service revenue.
(g ) Equipment. (h) Rent expense.
(i) Salaries and wages payable.

The liabilities are (c) Accounts payable and (i) Salaries and wages payable.
Example of Common business transactions:
Owner’s Investment to Form the Business
July 1: Joan Miller invests $40,000 in cash to form Miller Design Studio.

Economic Event That Is Not a Business Transaction

July 2: Orders office supplies, $5,200.

Prepayment of Expenses in Cash

July 3: Rents an office; pays two months’ rent in advance, $3,200.

Purchase of an Asset on Credit

July 5: Receives office supplies ordered on July 2 and an invoice for $5,200.

Purchase of an Asset Partly in Cash and Partly on Credit

July 6: Purchases office equipment, $16,320; pays $13,320 in cash and agrees to pay the rest next
month.

Payment of a Liability
July 9: Makes a partial payment of the amount owed for the office supplies received on July 5,
$2,600.

Revenue in Cash
July 10: Performs a service for an investment advisor by designing a series of brochures and
collects a fee in cash, $2,800.

Revenue on Credit
July 15: Performs a service for a department store by designing a TV commercial; bills for the fee
now but will collect the fee later, $9,600.

Revenue Collected in Advance

July 19: Accepts an advance fee as a deposit on a series of brochures to be designed, $1,400.

Collection on Account
July 22: Receives cash from customer previously billed on July 15, $5,000.

Expense Paid in Cash

July 26: Pays employees four weeks’ wages, $4,800.

Expense to Be Paid Later

July 30: Receives, but does not pay, the utility bill that is due next month, $680.

Withdrawals
July 31: Withdraws $2,800 in cash.
Transaction Analysis Problem and Solution:

Joan Robinson opens her own law office on July 1, 2012. During the first month of operations, the following
transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries and wages $500, utilities $300, and supplies $100.
8. Joan withdraws $1,000 cash for personal use.
Instructions
(a) Prepare a tabular summary of the transactions.