CHAPTER 1

ACCOUNTING IN ACTION
Accounting Principle
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 2. Using accounting information
Internal users
Internal users of accounting information plan, organize and run companies. They work for
the company
In running a business, internal users must answer many important
question:
To answer the question above, users need detailed information on a
timely basis; that is, it must be available when we needed. Some
example of information that internal user need include:
 External users

 Investors, who are owners or potential  Customers are interested in

owners of the business, use accounting whether a company will continue
information to make decisions to buy, hold, to honor its product warranties
or sell their ownership interest. and support its product lines.

 Creditors – persons or other businesses that  Regulatory agencies want to

are owed money by the business, such as know whether the company is
suppliers and bankers – use the accounting respecting established rules.
information to evaluate the risks of granting
credit or lending money.

 Taxation authorities want to know whether

the company respects the tax laws.
 DO IT 1.1 Users of accounting information
The following Users of accounting information Whether they An example of a question that might be
is the list of are an internal asked by that user
some users of or external
accounting user, and
information.
For each user
indicate 1. Creditor External Will the business be able to pay back the
loan?
2. Viet Nam Revenue Agency External Is the company following the tax laws?

3. Investor External Should I invest money in the company?

4. General manager of the production Internal How much will it cost to produce the
department product?
5. Manager of the human resources Internal Can the company afford to give the
department. employees raises?
 3. The forms of business organization
Forms of
business
organization

Partnershi
Proprietorship Corporation
p

A business that is organized

(incorporated) as a separate
A business owned
legal entity under federal or
by one a person
is a
provincial corporate law is a
proprietorship corporation.
A business owned by two
or more persons who are
associated as parners is a
partnership.

7
 Summary of the important characteristics of each organizational
form a business

Characteristic Proprietorship Parnership Corporation

Owners one Two or more One or more

Owner’s liability unlimited unlimited Limited
Private or public Private Usually private Private or public
Taxation of profits Paid by the owned Paid by the parners Paid by the corporation

Life of organization Limited Limited Unlimited

Separate legal Not a separate legal Not a separate legal entity Not a separate legal entity
entity from its owners from the parners from the shareholders

DO IT 1.2 Answer the question:

1. Number and type of owners?
2. If it has limited or unlimited liability
3. If it is a separate legal entity from its owners
 Transaction identification process

Event: Purchase computer Answer question from Pay rent

potential customer

Is there a change in economic resources or claims on the resources of the

company and can the event be measured in monetary terms?

Record Don’t record Record

 CHAPTER 2

ACCOUNTING EQUATION
AND TRANSACTION ANALYSIS
Accounting Principle
 The Expanded Accounting Equation

The basic accounting equation shows that assets are equal to liabilities plus owner’s equity.
But we also know that it is necessary to report on revenues, expenses, and other changes in
owner’s equity. We have expanded the basic accounting equation to show the different parts
of owner’s equity and the relationship between revenues, expenses, profit (or loss), and
owner’s equity.
Balance sheet

Assets = Liabilities + Owner’s Equity

Owner’s capital - Drawings + Profit (or loss) - dividends

(Investments)
Revenues - expenses
Income statement
 DO IT 1.4 The Accounting Equation

The following are a few of the items that are reported in financial statements:
1. Cash
2. Service revenue
3. Drawings
4. Accounts receivable
5. Accounts payable
6. Salaries expenses

a. Classify the items assets, liabilities, or owner’s equity. For the owner’s equity
items, indicate whether these items increase or decrease equity.

b. Indicate which financial statement the item is reported in.

 DO IT 1.4 The Accounting Equation

Solution
Items Type of item Financial Statement

1. Cash Assets Balance sheet

2. Service revenue Owner’s equity - increase Income statement

3. Drawings Owner’s equity -decrease Statement of Owner’s

equity
4. Accounts receivable Assets Balance sheet

5. Accounts payable Liabilities Balance sheet

6. Salaries expenses Owner’s equity-decrease Income statement

 LO2. Transaction Analysis

Once it has been determined that an event or transaction should be recognized, it must be
analyzed for its effect on the components of the accounting equation before it can be
recorded. This analysis must identify the specific items that are affected and the amount of
change in each item.

Each transaction must have a dual effect on the equation for the two sides of the accounting
equation to remain equal.

Ex. An asset (equipment) could increase by $10,000, a different asset (cash) decrease by
$6,000, and a liability (notes payable) could increase by $4,000.
 Transaction 1: Investment by Owner

Andrew Leonid decides to open a computer programming business, which he names

Softbyte. On September 1, 202X, he invests $15,000 cash in the business, which he
deposited in a bank account opened under the name of Softbyte. This transaction results in an
equal increase in both assets and owner’s equity for Softbyte, as shown in Illustration 1.13

Basic Analysis The asset Cash is increased by $15,000, and the owner’s equity
account, A.Leonid, capital, is increased by $15,000
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash = A.Leonid,Capital

+ $15,000 = $ 15,000
(Tr1)
Illustration 1.13. Investment of cash by owner
 Transaction 2: Purchase of equipment for cash

Softbyte purchases computer equipment for $7,000 cash. This transaction result in an equal
increase and decreased in total assets, though the composition of the asset changes. The
specific effect of this transaction and the cumulative effect of the first two transactions are
demonstrated in Illutration 1.14
Basic Analysis The asset Cash is decreased by $7,000, and the asset Equipment is
increased by $7,000
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash + Equipment = A.Leonid,Capital

Old Balance + $15,000 = $ 15,000
(Tr2) -$7,000 +$7.000
New Balance +$8,000 + $7,000 = $15,000
$15,000
Illustration 1.14. Investment of cash by owner $15,000
 Transaction 3: Purchase of Supplies on Credit

Softbyte purchases $1,600 of computer paper and other supplies that are expected to last
several months from the Alpha Supply Company. Alpha Supply will allow Softbyte to pay
this bill next month (in October). This transaction is referred to as a purchase on account, or
credit purchase. Assest are increased because the use of the paper and supplies is capale of
producing economic benefits. Liabilities are increased by the amount that is due to Alpha
Supply Company.
Basic Analysis The asset Cash is decreased by $7,000, and the asset Equipment is increased by $7,000
Assets = Liabilities + Owner’s Equity
Equation Analysis Cash + Supplies + Equipment = Accounts payable A.Leonid,Capital
Old Balance + $8,000 $7,000 = $ 15,000
(T3) + $1,600 $1,600
New Balance +$8,000 + $1,600 + $7,000 = $1,600 + $15,000
$16,600 = $16,600

Illustration 1.15. Purchase of supplies on credit

 Transaction 3: Purchase of Supplies on Credit

Softbyte purchases $1,600 of computer paper and other supplies that are expected to last
several months from the Alpha Supply Company. Alpha Aupply will allow Softbyte to pay
this bill next month (in October). This transaction is referred to as a purchase on account, or
credit purchase. Assest are increased because the use of the paper and supplies is capale of
producing economic benefits. Liabilities are increased by the amount that is due to Alpha
Supply Company.
Basic Analysis The asset Cash is decreased by $7,000, and the asset Equipment is increased by $7,000
Assets = Liabilities + Owner’s Equity
Equation Analysis Cash + Supplies + Equipment = Accounts payable A.Leonid,Capital
Old Balance + $8,000 $7,000 = $ 15,000
(T3) + $1,600 $1,600
New Balance +$8,000 + $1,600 + $7,000 = $1,600 + $15,000
$16,600 = $16,600

Illustration 1.15. Purchase of supplies on credit

 Transaction 4: Services provided for Cash

Softbyte receives $1,200 cash from customers for programming services it has provided.
This transaction is Softbyte’s main revenue-producing activity. Remember that revenue
increases profit, which then increases owner’s equity.

Basic Analysis The asset Cash is increased by $1,200, and the the owner’s equity account Sevices Revenue is
increased by $1,200
Assets = Liabilities + Owner’s Equity
Equation Analysis Cash + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues
Old Balance +$8,000+$1,600 + $7,000 = $1,600 + $15,000
(Tr4) + $1,200 $1,200
New Balance +$9,200 + $1,600 + $7,000 = $1,600 + $15,000 + $1,200
$17,800 = $17,800

Illustration 1.16. Services provided for cash

 Transaction 5: Purchase of Advertising on Credit

Softbyte receives a bill for $250 from the local newspaper for advertising the opening of its
business. It postpones payment of the bill until a later date. The cost of advertising is an
expense, and not an asset, because the benefits have already been used. Owner’s equity
decrease because an expense is incurred. Expenses reduce profit and owner’s equity.
Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising Expensive is
increased by $250
Assets = Liabilities + Owner’s Equity
Equation Analysis Cash + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses
Old Balance +$9,200+$1,600 + $7,000 = $1,600 + $15,000
(Tr5) + $250 - $250
New Balance +$9,200 + $1,600 + $7,000 = $1,850 + $15,000 + $1,200 - $250
$17,800 = $17,800

Illustration 1.17. Purchase of Advertising on Credit

 Transaction 6: Services provided for cash and credit

Softbyte provides $3,500 of programming services for customers. Cash of $1,500 is received
from the customers, and the banlance $2,000 is billed to customers on account. This
transaction result in an equal in crease in asset and owner’s equity.
Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising
Expensive is increased by $250
Assets = Liabilities + Owner’s Equity
Equation Analysis Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses
Old Balance +$9,200 + $1,600 + $7,000 = $1,850 + $15,000 + $1,200 - $250
(Tr6) +$1,500 + $2,000 + $3,500
New Balance +$10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $15,000 + $4,700 - $250
$21,300 = $21,300

Illustration 1.18. Services provided for cash

 Transaction 7: Payment of expense

The expenses paid in cash for September are store rent $600, salaries of employees $900, and
Utilities $200. These payments result in an equal decrease in assets and owner’s equity.
Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising Expensive is increased by
$250
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses

Old Balance +$10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $15,000 + $4,700 - $250

(Tr7) -$600 - $600

-$900 - $900
-$200 - $200

New Balance +$9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $15,000 + $4,700 - $1,950

$19,600 = $19,600

Illustration 1.19. Payment of expense

 Transaction 8: Payment of account payable

Softbyte pays its $250 advertising bill in cash. Remember that the bill was previously
recorded in transaction (5) as an increase in Account payable, and decrease in owner’s equity.

Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising Expensive is increased by
$250
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses

Old Balance +$9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $15,000 + $4,700 - $1,950

(Tr8) -$250 - $250

New Balance +$8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $250

$19,350 = $19,350

Illustration 1.20. Payment of account payable

 Transaction 9: Receipt of cash on account

The sum of $600 in cash is received from some customers who were billed for services in
transaction(6). This transaction does not change total asset, but it does change in composition
of those assets.
Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising Expensive is increased by
$250
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses

Old Balance +$9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $15,000 + $4,700 - $1,950

(Tr9) +$600 - $600

New Balance +$9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $250

$19,350 = $19,350

Illustration 1.21. Receipt of cash on account

 Transaction 10: Signed contract to rent equipment in October

Andrew Leonid and an equipment supplier sign a contract for Softbyte to rent equipment for
the months of October and November at the rate of $250 per month. Softbyte is to pay each
month’s rent at the start of the month. There are no effect on the accounting equation because
the assets, liabilities and owner’s equity have not been changed by the signing of the
contract. An accounting transaction has not occurred. At this point, Softbyte has not paid for
anything, nor has it used the equipment, and therefore it has not incurred any expenses.
Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising Expensive is increased by
$250
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses

Old Balance +$9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $250

(Tr10) No entry

New Balance +$9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $250

$19,350 = $19,350

Illustration 1.22. Signed contract to rent equipment in October

 Transaction 11: Withdrawal of cash by Owner

Andrew Leonid withdraws $1,300 in cash from the business for his personal use. This
transaction results in an equal decrease in an asset, and owner’s equity.

Basic Analysis The liabilities Accounts Payable is increased by $250 and the owner’s equity account Advertising Expensive is increased by
$250
Assets = Liabilities + Owner’s Equity

Equation Analysis Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues - expenses

Old Balance +$9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $250

(Tr11) - $1,300 - $1,300

New Balance +$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $13,700 + $4,700 - $250

$18,050 = $18,050

Illustration 1.23. Withdrawal of cash by Owner

 Summary of transactions
Illustration 1.24. Tabular summary of Softbyte transactions
Tr Accounting Aquation

Assets = Liabilities + Owner’s Equity

Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues – expenses

1 +$15,000 + $15,000

2 - $7,000 + $7,000

3 +$1,600 +$1,600

4 + $1,200 + $1,200

5 +$250 -$250

6 +$1,500 +$2,000 + $3,500

7 -$1,700 -$1,700

8 -$250 -$250

9 +$600 -$600

10 No Entry

11 -$1,300 -$1,300

Sum $8,050 + $1,400 + $1,600 + $7,000 $1,600 + $13.700 + $ 4,700 - $ 1,950

Sum $ 18,050 = $ 18,050

 DO IT 1.5 Tabular Analysis

Transactions for the month of August by Dawd & Co., a public accounting firm, are shown
below. Make a table that shows the effect of these transactions on the accounting equation,
like the tabular analysis shown in Illustration 1.24.
1. The owner, John Dawd, invested $25,000 of cash in the business.
2. Equipment was purchase on credit, $7,000.
3. Services were performed for customers for $8,000. Of this amount, $2,000 was received
in cash and $6,000 is due on account.
4. Rent of $850 was paid for the month.
5. Customers on account paid $4,000 (see transaction 3).
6. The owner withdrew $1,000 of cash for personal use.
 Summary of transactions

Tr Accounting equation

Assets = Liabilities + Owner’s Equity

Cash + Account Receivable + Equipment = Accounts payable + A.Leonid,Capital + revenues – expenses

1 +$25,000 + $25,000

2 + $7,000 + $7,000

3 +$2,000 +$6,000 +$8,000

4 - $850 - $850

5 + $4,000 -$4,000

6 -$1,000 -$1,000

Sum $29,150 + $2,000 + + $7,000 = $7,000 + $ 24,000 + $ 8,000 - $850

Sum $ 38,150 = $ 38,150

Illustration 1.25. Tabular summary of Dawd’s transactions

 LO3. Prepare Financial Statements
DO IT! 1.6
LO3. Prepare Financial Statements
 LO3. Prepare Financial Statements
Joan Robinson, Attorney
Income Statement
July 31, 202X
Details Total
Revenues $3,500
Service revenue
Expenses
Rent expense $800
Salaries and wages expense $500
Utilities expense $300
Supplies expense $100
Total expenses $1,700
Net income $1,800
 LO3. Prepare Financial Statements
Joan Robinson, Attorney
Statement of Owner’s Equity
July 31, 202X
Details Total
Owner’s capital, July 1 $0
Add: Investments $11,000
Net income $1,800 $12,800
Less: Drawings $1,000 $1,000
Owner’s capital, July 31 $11,800
 LO3. Prepare Financial Statements
Joan Robinson, Attorney
Balance Sheet
July 31, 202X
Assets
Cash $10,500
Accounts receivable $2,000
Equipment $3,000
Total assets $15,500
Liabilities and Owner’s Equity
Liabilities $3,700
Notes payable $ 700
Accounts payable $3,000
Owner’s equity $11,800
Owner’s capital $11,800
Total liabilities and owner’s equity $15,500
 CHAPTER 3
FINANCIAL STATEMENT

Accounting Principle
 Financial statement

1. Income statement

2. Statement of owner’s equity

Financial statement including
3. Balance sheet

4. Cash flow statement

5. Explanatory statement

Notes
The income statement, statement of owner’s equity, and cash flow statement all report
information for a period of time.
The balance sheet reports information at a point in time.
 Demonstration problem
Adina Falk opened her own law office on July 1, 202X. During the first month of operations,
the following transactions occurred.
1. Invested $15,000 in cash in the law practice.
2. Hired a legal assistant to work part-time for $1,500 per month.
3. Paid $1,800 for July rent on office space
4. Purchased equipment on account, $3,000.
5. Provided legal services to clients for cash, $2,500.
6. Borrowed $7,000 cash from a bank on a note payable.
7. Provided legal services to a client on account, $4,000.
8. Collected $1,200 of the amount owed by a client on account (see transaction 7).
9. Paid monthly expenses: salaries, $1,500; telephone, $200; and utilities, $300.
10. Withdrew $2,000 cash for personal use.
Require:
a. Prepare a Adina Falk analysis of the transactions.
b. Prepare the financial statements.
 CHAPTER 4
THE RECORDING PROCESS
Accounting
Principle
 Summary of debit/credit rules and effects for
the expanded accounting equation

Assets = Liabilities + Owner’s Equity

Owner’s
Capital _ Drawings + Revenues _ Expenses
Assets Liabilities +
= Cr Dr Cr Dr Cr Dr Cr Dr Cr
Dr Cr Dr - + + -
- + + -
+ - - +

Remember, the normal balance of each account is on its increase side. So assets,
drawings, and expense accounts have a normal debit balance, while liabilities, owner’s
capital, and revenue accounts have a normal credits balance.
 DO IT 2.1. Normal Account Balances
Brooke Schwenke has just rented space in a shooping mall where she will open a salon and
spa called the Oasis Spa. Brooke had detenmined that the company will need the following
accounts:
1. Account payable
2. Cash
3. B.Schwenke, Capital
4. B.Schwenke, Drawings
5. Equipment
6. Rent Expense
7. Service Revenue
8. Supplies
a. Indicaste whether each of these accounts is an asset, liabilities, or owner’s equity
account. If it is an owner’s equity account, indicate what type it is.
b. What is the normal balance of these account?
c. Will a debit increase or decrease these accounts?.
 Summary of transactions
Illustration 1.24. Tabular summary of Softbyte transactions
Tr Accounting Aquation

Assets = Liabilities + Owner’s Equity

Cash + Account Receivable + Supplies + Equipment = Accounts payable + A.Leonid,Capital+ revenues – expenses

1 +$15,000 + $15,000

2 - $7,000 + $7,000

3 +$1,600 +$1,600

4 + $1,200 + $1,200

5 +$250
-$250
6 +$1,500 +$2,000 + $3,500

7 -$1,700
-$1,700
8 -$250 -$250

9 +$600 -$600

10 No Entry

11 -$1,300 -$1,300

Su $8,050 + $1,400 + $1,600 + $7,000 $1,600 + $13.700 + $ 4,700 -

m $ 1,950
43