The Accounting Equation

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The Accounting Equation
A L OE
Simple
A L OE

R - E
Expanded
Net Profit belongs to Owners therefore increase
owners equity
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Balance Sheet A Starting Point
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Assets

• Assets
• resources controlled by the enterprise
• past events
• provide future economic benefits

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Liabilities

• Liabilities
• present obligation
• past events
• future outflows of economic benefits

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Owners Equity

• Owners equity
• the residue of Assets over Liabilities
• represents the owners claim in the business.

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Owners Equity
Changes in Owners Equity

• Owners Withdrawals
• Business Losses

• Owners Investments
• Business Earnings

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The Accounting Equation
Assets Liabilities Owners
Equity 300,000 80,000 220,000
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Lets analyze some transactions for JJs Lawn
Care Services.
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The Effects of Business Transactions
On May 1, 2001, Jill Jones deposited 8,000 in
the bank to officially start JJs Lawn Care
Service.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 2, 2001, JJs purchased a riding lawn
mower for 2,500 cash.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 8, 2001, JJs purchased a 15,000
truck. JJs paid 2,000 down in cash and issued a
note payable for the remaining 13,000.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 11, 2001, JJs purchased some repair parts
for 300 on account.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 18, 2001, JJs sold half of their repair
parts to ABC Lawns for 150, a price equal to
JJs cost. JJs will receive the cash within 30
days.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 25, 2001, ABC Lawns pays JJs 75 as a
partial settlement of its accounts receivable.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 28, 2001, JJs pays 150 of its accounts
payable.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 29, 2001, JJs recorded lawn care services
provided during May of 750. All clients paid in
cash.
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The Effects of Business Transactions
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The Effects of Business Transactions
On May 31, 2001, JJs purchased gasoline for the
lawn mower and the truck for 50 cash.
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The Effects of Business Transactions
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The Effects of Business Transactions
Lets review how JJs transactions affected the
accounting equation.
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These transactions impact the Statement of Cash
Flows.
These transactions impact the Income Statement.
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Lets prepare the Income Statement and Statement
of Cash Flows for JJs Lawn Care Service for the
month ending May 31, 2001.
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Investments and withdrawals by the owner are not
included on the Income Statement.
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Operating activities include the cash effects of
revenue and expense transactions.
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Investing activities include the cash effects of
purchasing and selling assets.
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Financing activities include the cash effects of
transactions with the owner and creditors.
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Relationships Among Financial Statements
Beginning of period
End of period
Time
Balance Sheet
Balance Sheet
Income Statement Statement of Cash Flows