ch02 - CHAPTER TWO ANALYZING TRANSACTIONS: The Accounting...

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CHAPTER TWO ANALYZING TRANSACTIONS: The Accounting Equation
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BUSINESS ENTITY An individual, association, or organization That engages in economic activities And controls specific economic resources Business entity’s finances kept separate from those of owner (Business Entity Concept)
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ASSETS ITEMS OWNED BY A BUSINESS THAT WILL PROVIDE FUTURE BENEFITS MUST BE “OWNED” NOT RENTED
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ASSETS ITEMS OWNED BY A BUSINESS THAT WILL PROVIDE FUTURE BENEFITS BUT DOESN’T HAVE TO BE PAID OFF, COULD STILL BE MAKING PAYMENTS ON IT
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ASSETS EXAMPLES: CASH MERCHANDISE FURNITURE FIXTURES MACHINERY BUILDINGS LAND ACCOUNTS RECEIVABLE
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ACCOUNTS RECEIVABLE The amount of money owed to the business By its customers As a result of making sales “on account” or “on credit” Simply, customers who have promised to pay sometime in the future
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LIABILITIES PROBABLE FUTURE OUTFLOW OF ASSETS AS A RESULT OF A PAST TRANSACTION OR EVENT IN OTHER WORDS, DEBTS OR OBLIGATIONS OF THE BUSINESS THAT CAN BE PAID WITH CASH, GOODS , OR SERVICES
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LIABILITIES EXAMPLES: ACCOUNTS PAYABLE NOTES PAYABLE
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ACCOUNTS PAYABLE Unwritten promise to pay a supplier for assets purchased or services rendered Referred to as making a purchase “on account” or “on credit” Be careful!! Don’t confuse Accounts Receivable and Accounts Payable. Ask yourself, are we waiting to receive? Or waiting to pay?
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NOTES PAYABLE Formal written promises to pay suppliers or lenders Specific sums of money at definite future times
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OWNER’S EQUITY AMOUNT BY WHICH THE BUSINESS ASSETS EXCEED THE BUSINESS LIABILITIES NET WORTH CAPITAL ALSO CALLED: OR
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EXAMPLE: If a business has total Assets of $100,000 and total Liabilities of $60,000, what is the Owner’s Equity? Once the debts are paid, the remaining assets belong to the owner (Owner’s Equity).
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EXAMPLE: If a business has total Assets of $100,000 and total Liabilities of $60,000, what is the Owner’s Equity? FORMULA: $100,000 $60,000 = $40,000 ASSETS LIABILITIES = OWNER’S EQUITY Can also be expressed as: Assets = Liabilities + Owner’s Equity
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BUSINESS ENTITY CONCEPT Owner may have business assets and liabilities and nonbusiness assets and liabilities Nonbusiness assets and liabilities are not included in the entity’s accounting records If owner invests money or other assets in the business, the item is now a business asset
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ACCOUNTING EQUATION Assets Liabilities = Owner’s Equity + Left side: Assets
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ACCOUNTING EQUATION Assets Liabilities = Owner’s Equity + Right side shows where the money came from to buy the assets
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BUSINESS TRANSACTION An economic event that has a direct impact on the business Usually requires an exchange with an outside entity Must be able to measure this exchange in dollars All transactions affect the accounting equation through specific accounts
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ACCOUNT A separate record used to summarize changes in each asset, liability, and owner’s equity of a business
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ANALYZING BUSINESS TRANSACTIONS THREE QUESTIONS:
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QUESTION #1 WHAT HAPPENED?
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This note was uploaded on 10/13/2010 for the course ACCT 205 taught by Professor Schorg during the Fall '06 term at Loyola New Orleans.

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ch02 - CHAPTER TWO ANALYZING TRANSACTIONS: The Accounting...

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