– Investments by owner increase owner’s equity . • Drawings: – Are withdrawals of cash or other assets by the owner for personal use . – Drawings decrease owner’s equity .
10/16/2016 5 Owners’ Equity • Revenues: – Revenues represent the gross increases in owner’s equity from business activities entered into for the purpose of earning income. – Revenues may result from sale of merchandise , provision of services , rental of property , or lending money . • Expenses: – Expenses are decreases in owner’s equity that result from operating the business. – They are the cost of assets consumed or services used in the process of earning revenue. – Examples: utility expense , rent expense , supplies expense , salaries expense , and advertising expense . Owners’ Equity • In summary, subdivisions of Owner’s Equity and the • effect of each subdivision on owners’ equity are: • 1. Investments by Owner or Capital (+). • 2. Drawing (-). • 3. Revenues (+). • 4. Expenses (-). • Revenues and expenses determine if a net income or net loss occurs as follows: a. Revenues > Expenses: Net Income . b. Revenues < Expenses: Net Loss .
10/16/2016 6 Business Transactions and Transaction Analysis • Transactions are the economic events of the enterprise that are recorded. • Transactions may be identified as external or internal. – External transactions involve economic events between the company and some outside enterprise or party. – Internal transactions are economic events that occur entirely within the company. • Each transaction must be analyzed in terms of its effect (increase or decrease) on the components of the basic accounting equation. • The analysis must identify the specific items affected and the amount of the change (increase or decrease) in each item. Business Transactions and Transaction Analysis • Each transaction has a dual effect on the equation . For example, if an individual asset is increased, there must be a corresponding: – a. decrease in another asset, or – b. increase in a specific liability, or – c. increase in owner's equity. • A tabular summary may be prepared to show the cumulative effect of transactions on the basic accounting equation. The summary demonstrates that: – a. Each transaction must be analyzed in terms of its effect on the three components of the equation, and the specific items within each component. – b. The two sides of the equation must always be equal. – c. The causes of each change in the owner's claim on assets must be indicated in the owners' equity column.
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- Fall '16
- taher refaat
- Accounting, Generally Accepted Accounting