Accounting Principles

Dr/ Riham Mahmoud Essawy

 Lecture Three Outline

➢ The Accounting Equation.

➢ Using Accounting Equation to Analyze Transactions.
➢ Financial Statements.

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 The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

▪ At any time Assets must equal the sum of Liabilities and Owner’s
Equity.
▪ Any transaction must maintain the balance of the accounting
equation.

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Exercise (1):

Determine the missing items:

Assets = Liabilities + Owner’s Equity
$85,000 = $52,000 + (a) $33,000

(b) = $28,000 + $34,000 $62,000

$84,000 = (c) + $50,000 $34,000

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Exercise (2):
Presented below are balance sheet items for Black Angel Company at
December 31, 2014.
Accounts payable $35,000
Accounts receivable 36,000
Cash 17,000
Equipment 77,000
Owner’s capital 45,000
Notes payable 50,000
Compute each of the following:
1. Total assets.
2. Total liabilities.
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 Solution:
1- Total assets: Accounts receivable $ 36,000
Cash 17,000
Equipment 77,000
Total assets $130,000
2- Total liabilities:
Accounts payable $35,000
Notes payable 50,000
Total liabilities $85,000

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 The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

Owner’s Owner’s Revenues - Expenses

Assets = Liabilities + Capital - Drawings +

The Expanded Accounting Equation

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Multiple Choice:
1-The basic accounting equation cannot be restated as
a. Assets – Liabilities = Owner's Equity.
b. Assets – Owner's Equity = Liabilities.
c. Owner's Equity + Liabilities = Assets.
d. Assets + Liabilities = Owner's Equity. Ans: d

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 Using The Accounting Equation to Analyze Transactions
Exercise (1):
Identify the impact on the accounting equation of each of the
following transactions.

1. Purchase office supplies on account.

Increase assets (Supplies) and increase liabilities (A/P)
2. Paid secretary weekly salary.
Decrease assets (Cash) and decrease owner’s equity (Expense)
3. Purchased office furniture for cash.
Increase assets (Furniture) and decrease assets (Cash)
4. Received monthly utility bill to be paid at later time.
Increase liabilities (A/P) and decrease owner’s equity (Expense)
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 Exercise (2):
Selected transactions for Mountain Goats Tree Service are listed below:
1. Made cash investment to start business.
2. Paid for monthly advertising.
3. Purchased supplies on account.
4. Billed customers for services performed.
5. Withdrew cash for owner’s personal use.
6. Incurred utilities expense on account.
7. Purchased additional supplies for cash.
8. Received cash from customers when service was performed.
Required: List the numbers of the above transactions and describe the
effect of each transaction on assets, liabilities, and owner’s equity.
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Solution:
1. Made cash investment to start business.
Increase in assets (cash) and increase in owner’s equity (capital)
2. Paid for monthly advertising.
Decrease in assets (cash) and decrease in owner’s equity (expense)
3. Purchased supplies on account.
Increase in assets (Supplies) and increase in liabilities (A/P).
4. Billed customers for services performed.
Increase in assets (A/R) and increase in owner’s equity (Revenue)
5. Withdrew cash for owner’s personal use.
Decrease in assets (Cash)
Accountingand decrease
Principles - Dr/Rihamin owner’s
Mahmoud Essawyequity (withdrawal)
11
Solution:

6. Incurred utilities expense on account.

Increase in liabilities (A/P) and decrease in owner’s equity (Expense)
7. Purchased additional supplies for cash.
Increase in assets (Supplies) and decrease in assets (Cash)
8. Received cash from customers when service was performed.
Increase in assets (Cash) and increase in owner’s equity (Revenue)

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Exercise (3):

+ Cash NE + Revenue
+ Equip. + A/P NE
- Cash NE - Expense
+ Cash - A/R NE NE
- Cash NE - Expense
- Cash - A/P NE
+ Supplies + A/P NE
- Cash NE - withdrawal
+ Cash + Bank Loan NE
NE
+ A/RMahmoud Essawy
Accounting Principles - Dr/Riham + Revenue
13
Exercise (4):
The following transactions represent part of the activities of Bloc Party
Company for the first month of its existence. Indicate the effect of
each transaction upon the total assets of the business by one of the
following phrases: increased total assets, decreased total assets, or no
change in total assets.
(a) The owner invested cash to start the business.
(b) Purchased a computer for cash.
(c) Purchased office equipment with money borrowed from the bank.
(d) Paid the first month's utility bill.
(e) Collected an accounts receivable.
(f) Owner withdrew cash from the business.
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 Solution:
(a) The owner invested cash to start the business.
Increase in total assets (cash)
(b) Purchased a computer for cash.
+ (Computer) and - (Cash), NO Change in Total Assets
(c) Purchased office equipment with money borrowed from the bank.
Increase in total assets (Equipment)
(d) Paid the first month's utility bill.
Decrease in total assets (cash)
(e) Collected an accounts receivable.
+ (Cash)and - (A/R) NO Change in Total Assets
(f) Owner withdrew cash from the business.
Decrease in total assets (cash)
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 Financial Statements
Financial Statements:
Companies prepare five financial statements to report the financial
information about the business at the end of each accounting period
(monthly, quarterly, semiannual, yearly).
1- Income Statement.
2- Comprehensive Income Statement.
3- Owner’s Equity Statement.
4- Statement of Financial Position (Balance Sheet).
5- Statement of Cash Flows.
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 Financial Statements
Sequence - Order

Statement of
Income Owner’s Equity Financial
Statement Statement Position
(Balance Sheet)

Result Result
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 Financial Statements
1- Income Statement:
Presents a summary of a business entity’s revenues and expenses
for a period of time (month, quarter, semi-annual, or annually).
Format: -------- Company
Income Statement
For the-----Ended-----
Revenues:

(-) Expenses:

= Net Income or Loss

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Exercise (1):

Read the Instructions (Requirement) FIRST

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Solution: Gilligan Cruise Company
Income Statement
For the Year Ended December 31, 2014
Revenues:
Ticket Revenues $410,000
(-) Expenses:
Maintenance and Repairs Expense $95,000
Utilities Expense 10,000
Salaries and Wages Expense 142,000
Advertising Expense 24,500
Total Expenses (271,500)
= Net Income $138,500
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Exercise (2):
Presented below is information related to Cindy Godfrey Company
that provides craft opportunities for the year 2023;

Required:
Prepare Income Statement for Cindy Godfrey Company.
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Solution: Cindy Godfrey Company
Income Statement
For the Year Ended December 31, 2023
Revenues:
Service Revenues $6,700
(-) Expenses:
Advertising Expense $500
Rent Expense 1,600
Gasoline Expense 200
Utilities Expense 150
Total Expenses (2,450)
= Net Income or Loss $4,250
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 Financial Statements
Sequence - Order

Statement of
Income Owner’s Equity Financial
Statement Statement Position
(Balance Sheet)

Net Income or Net Loss

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 Financial Statements
2- Owner’s Equity Statement:
Shows the changes in capital during a time period.
Includes:

Increase Capital Decrease Capital

1- Owner Investment 1- Owner Drawings

2- Net Income OR 2- Net Loss
Calculated from
Income Statement
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 Financial Statements
Format: -------- Company
Owner’s Equity Statement
For the-----Ended-----
Beginning Capital XX
+ Owner Investment XX
+ / - Net Income Or Net Loss XX Or (XX)
- Owner Drawings (XX)

= Ending Capital XX

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Exercise (1):

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Solution: Bonnie Billy Company
Income Statement
For the Year Ended December 31, 2023
Revenues:
Service Revenues $65,500
(-) Expenses:
Salaries and Wages Expense $29,000
Advertising Expense 6,500
Rent Expense 9,500
1,400
Utilities Expense
Total Expenses (46,400)
= Net Income $19,100
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Solution: Bonnie Billy Company
Owner’ Equity Statement
For the Year Ended December 31, 2023

Beginning Capital Jan. 1, 2023 $67,000

+ Owner Investment 0
+ Net Income 19,100
- Owner Drawings (6,000)

= Ending Capital Dec. 31, 2023 $80,100

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 Financial Statements
Sequence - Order

Statement of
Income Owner’s Equity Financial
Statement Statement Position
(Balance Sheet)

Net Income or Net Loss Ending Capital

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 Financial Statements
3- Statement of Financial Position (Balance Sheet):
➢ B.S lists a business entity’s assets, liabilities, and owner’s equity
of a specific data (at the end of a month, quarter, semiannually,
annually).
➢ It is the mirror of the Accounting Equation.

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 Financial Statements
Format: -------- Company
Statement of Financial Position
At ----------
Assets Liabilities and Owner’s Equity
Current Assets: Liabilities:
Current Liabilities:
Long Term Assets: Long Term Liabilities:
Owner’s Equity:
(From Owner’s Equity Statement)
Total Assets XX Total Liabilities and XX
Must be Equal Owner’s Equity
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Exercise (1):
Presented below is information about statement of financial position
items of Clear View Company at Dec 31, 2023;
Account Payable $6,000 Cash $11,000
Account Receivable 15,000 Capital – Dec 31 121,000
Building 96,000 Equipment 5,000
Required:
Prepare Statement of Financial Position at Dec 31, 2023.

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 Solution: Clear View Company
Statement of Financial Position
At Dec 31, 2023 Liabilities and
Assets Owner’s Equity
Current Assets: Liabilities:
Cash $11,000 Current Liabilities:
Account Receivable 15,000 Account Payable $6,000
Long Term Assets:
Owner’s Equity:
Building 96,000
5,000 Capital – Dec 31 121,000
Equipment
Total Liabilities and
Total Assets $127,000 $127,000
Owner’s Equity
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Exercise (2): To be Solved for Next Lecture

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