Chapter One Asset, Liability, Owner’s Equity, Revenue, and Expense Accounts
Jan 04, 2016
Chapter One
Asset, Liability, Owner’s Equity, Revenue, and
Expense Accounts
Accounting Is Fun! 1 - 2
Performance Objectives
1. Define and identify asset, liability, and owner’s equity accounts
2. Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity
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Performance Objectives
3. Define and identify revenue and expense accounts
4. Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation
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Fundamental Accounting Equation
• A = L + OE
• Assets = Liabilities + Owner’s Equity
Itemsowned
Amountsowed tocreditors
Owner’sinvestment
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Performance Objective 1
Define and identify asset, liability, and owner’s equity accounts
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Define Asset
• Asset– Cash, properties, and other things of value
owned by an economic unit or business entity
– Provides (probable) future economic benefits
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Identify Assets
• Examples of assets:– Cash– Trucks– Buildings– Shoes in a shoe store– Kites in a kite store– Accounts Receivable
• The amount owed to you or the business
• Assets that seem like Expenses– Prepaid Insurance for one year
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Define Accounts Receivable
• Accounts Receivable– An account used to record the amounts
owed by charge customers• The business has legal claims against charge
customers
• Look for the words:– “Sold on account”
• A/R = Holding Tank for future receipt of cash
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Define Liability
• Liability– Debts or amounts owed to creditors– (Probable) sacrifice of future economic
benefits
• In one word:– Debt
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Identify Liabilities
• Examples of Debts/Liabilities– Loans (borrowing money)– Accounts Payable account
• Buy goods/services on credit• Receive a bill, but don’t pay until later• Buy supplies from a store, but pay for them
later
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Define Accounts Payable
• Accounts Payable– A liability account used for short-term
liabilities or charge accounts, usually due within thirty days
• Look for the words:– “Bought/purchased on account”– “Bought/purchase on credit
• A/P = Holding Tank for cash the business will pay out later
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Define Owner’s Equity
• The owner’s right to or investment in the business
• Assets – Liabilities = Owners’ Equity
• A – L = OE
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Identify Owner’s Equity
• What is left over for the owner after all the debts have been paid– Remember: Creditors must be paid before
the owner’s are paid
• In this text book we will use the account:– Capital
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Fundamental Accounting Equation
• A = L + OE
• Assets = Liabilities + Owner’s Equity– The equals sign means that one side must
always equal the other side– We’ll use this equation later to determine
whether we have recorded our business transactions correctly
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Fundamental Accounting Equation
Suppose the total value of the assets is $26,000 and the business entity does not owe any amount against the assets.
Assets = Liabilities + Owner’s Equity
$26,000 = $0 + $26,000
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Fundamental Accounting Equation
Suppose the total value of the assets consists of a truck that costs $23,000. The owner invested $11,000 in the truck and borrowed 12,000 from the bank.
Assets = Liabilities + Owner’s Equity
$23,000 = $12,000 + $11,000
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Determine Owner’s Equity
Ms. Burns has $9,000 invested in her travel agency, and the agency owes creditors $2,000.
Assets = Liabilities + Owner’s Equity
? = $2,000 + $9,000
Assets = Liabilities + Owner’s Equity
$11,000 = $2,000 + $9,000
$2,000 Liabilities
+ 9,000 Owner’s Equity
= 11,000 Assets
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Determine Owner’s Equity
Mr. Shea owns an auto lube shop. His business has assets of $36,000 and it owes creditors $5,000.
Assets = Liabilities + Owner’s Equity
$36,000 = $5,000 + ?
Assets = Liabilities + Owner’s Equity
$36,000 = $5,000 + $31,000
$36,000 Assets
- 5,000 Liabilities
= 31,000 Owner’s Equity
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Determine Owner’s Equity
Mr. Stan’s insurance agency has assets of $32,000; his investment (his equity) amounts to $20,000.
Assets = Liabilities + Owner’s Equity
$32,000 = ? + $20,000
Assets = Liabilities + Owner’s Equity
$32,000 = $12,000 + $20,000
$32,000 Assets
- 20,000 Owner’s Equity
= 12,000 Liabilities
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Performance Objective 2
Record a group of business transactions, in column form, involving changes in assets, liabilities, and owner’s equity
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Recording Business Transactions
We will be recording business transactions for a company with the following details:
Owner’s name: L.P. Arch
Business name: Arch Copy Co.
Business type: Sole Proprietorship(one-person business)
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Some Definitions
• Sole proprietorship– A one-owner business
• Separate entity concept– The concept by which a business is treated
as a separate economic or accounting entity
– The business stands by itself, separate from its owners, creditors, and customers
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Some Definitions
• Accounts– The categories under the Assets, Liabilities, and
Owner’s Equity headings– Examples:
• Cash• Truck• Accounts Payable• Capital
• Double-entry accounting– The system by which each business transaction is
recorded in at least two accounts and the accounting equation is kept in balance
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Some Definitions
• Fair market value– The present worth of an asset or the amount that
would be received if the asset were sold to an outsider on the open market
• Withdrawal– The taking of cash or other assets out of a
business by the owner for his or her own use– Account used:
• Drawing
– Treated as a temporary decrease in owner’s equity
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Steps in Recording a Business Transaction
1. What accounts are involved?• Cash, Parking Revenue, Etc…
2. What are the classifications of the accounts involved?
1. A = L + OE – R + E
3. Are the accounts increased or decreased?
4. Is the equation in balance after the transaction has been recorded?
1. A = L + OE – R + E
Remember: each business transaction must affect at least two accounts
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Transaction (a): Arch deposited $70,000 in a bank account in the name of business.
Assets = Liabilities + Owner's EquityItems owned Amounts owed to creditors Owner's investment
Cash = L. P. Arch, Capital(a) + 70,000 = + 70,000
Recording Transactions
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Recording Transactions
Transaction (b): Bought equipment, paying cash, $33,000.
= Liabilities + Owner's EquityAmounts owed to creditors Owner's investment
Cash + Equip. = L. P. Arch, CapitalPrev. Bal. + 70,000 = + 70,000(b) - 33,000 + 33,000
New Bal. 37,000 + 33,000 = 70,00070,000 = 70,000
AssetsItems owned
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Recording Transactions
Transaction (c): Bought equipment on account from Melton Office Supply, $7,000.
= Liabilities + Owner's Equity
Cash + Equip. = Accounts Payable + L. P. Arch, CapitalPrev. Bal. 37,000 + 33,000 = + 70,000(c) + 7,000 + 7,000New Bal. 37,000 + 40,000 = 7,000 + 70,000
=
Assets
77,000 77,000
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Transaction (d): Paid Melton Office Supply, a creditor, $2,000.
= Liabilities + Owner's Equity
Cash + Equip. = A/P + L. P. Arch, CapitalPrev. Bal. 37,000 + 40,000 = 7,000 + 70,000(d) - 2,000 - 2,000New Bal. 35,000 + 40,000 = 5,000 + 70,000
=
Assets
75,000 75,000
Recording Transactions
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Recording Transactions
Transaction (e): Arch invested her own personal data processing equipment in Arch Copy Co. having a fair market value of $6,200.
= Liabilities + Owner's Equity
Cash + Equip. = A/P +L. P. Arch,
CapitalPrev. Bal. 35,000 + 40,000 = 5,000 + 70,000(e) + 6,200 - 6,200New Bal. 35,000 + 46,200 = 5,000 + 76,200
=
Assets
81,200 81,200
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Performance Objective 3
Define and identify revenue and expense accounts
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Define Revenues
• The amounts a business earns
• Examples– Fees earned for performing services– Sales of merchandise– Rent income, and interest income
• May take the form of cash, credit card receipts, or accounts receivable (charge accounts)
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Identify Revenue Accounts
• Fees Earned for performing services
• Sales Income from selling merchandise
• Rent Income for the use of property
• Interest Income for lending money
• Credit Sales where cash will be received at a later time– Example: Home Depot sells lumber to a
customer and lets the customer pay later
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Define Expenses
• The costs that relate to earning revenue (the costs of doing business)
• Examples– Wages– Rent– Interest– Advertising
• May be paid in cash, immediately or at a future time (accounts payable)
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Identify Expense Accounts
• Wages Expense for labor performed
• Rent Expense for the use of property
• Interest Expense for the use of money
• Advertising Expense
• Expense incurred but not paid:– Example: Received a bill for a newspaper ad
you took out last week– Cash will be paid at a later time
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Owner’s Equity
• Revenues and expenses are under the umbrella of owner’s equity
• Revenue Add to Capital account
• Expenses Subtract from Capital account
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Define Chart of Accounts
The official list of account titles to be used to record the transactions of a business
111 Cash 311 L. P. Arch113 Accounts Receivable 312 L. P. Arch117 Prepaid Insurance
124 Equipment411 Income from Services
221 Accounts Payable 511 Wages Expense512 Rent Expense513 Supplies Expense514 Advertising Expense515 Utilities Expense
Chart of Accounts
Expenses (500s)
Assets (100s)
Liabilities (200s)
Owner's Equity (300s)
Revenues (400s)
, Capital, Drawing
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Performance Objective 4
Record a group of business transactions, in column form, involving all five elements of the fundamental accounting equation
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Transaction (f): Arch Copy Co. sold services for cash, $2,520.
= Liabilities +
Cash + Equip. = A/P + L. P. Arch, Capital + RevenuePrev. Bal. 35,000 + 46,200 = 5,000 + 76,200(f) + 2,520 + 2,520
(Income from Services)New Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520
=83,720 83,720
Assets Owner's Equity
Recording Transactions
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Transaction (g): Paid rent for the month, $700.
= Liabilities +
Cash + Equip. = A/P + L. P. Arch, Capital + Revenue + ExpensesPrev. Bal. 37,520 + 46,200 = 5,000 + 76,200 + 2,520(g) - 700 + 700
(Rent Expense)New Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 - 700
=83,020 83,020
Assets Owner's Equity
Recording Transactions
-
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Transaction (h): Arch Copy Co. bought supplies (toner and paper) on credit. These supplies are used
immediately; therefore, they are recorded as an expense ($600).
= Liabilities +
Cash + Equip. = A/P + L. P. Arch, Capital + Revenue + ExpensesPrev. Bal. 36,820 + 46,200 = 5,000 + 76,200 + 2,520 + 700(h) + 600 + 600
(Supplies Expense)
New Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300=83,020 83,020
Assets Owner's Equity
Recording Transactions
--
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Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy.
= Liabilities +
Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,820 + 46,200 = 5,600 + 76,200 + 2,520 - 1,300(I) - 360 +360
New Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300= 83,020
Assets
83,020
Owner's Equity
Recording Transactions
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Transaction (j): Arch Copy Co. received a bill for advertising expense.
= Liabilities +
Cash + Equip. + Ppd. Ins. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 = 5,600 + 76,200 + 2,520 - 1,300(j) + 200 + 200
(Advertising Expense)
New Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500= 83,02083,020
Assets Owner's Equity
Recording Transactions
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Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services
performed.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 = 5,800 + 76,200 + 2,520 - 1,500(k) + 1,050 + 1,050
(Income from Services)
New Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500=84,070 84,070
Assets Owner's Equity
Recording Transactions
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Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,460 + 46,200 + 360 + 1,050 = 5,800 + 76,200 + 3,570 - 1,500(l) - 1,800 - 1,800
New Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500=82,270 82,270
Assets Owner's Equity
Recording Transactions
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Transaction (m): Arch Copy Co. received and paid a bill from Regional Power, Inc., for $160.
Recording Transactions
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,660 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,500(m) - 160 + 160
(Utilities Expense)
New Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660=82,110 82,110
Assets Owner's Equity
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Transaction (n): Arch Copy Co. pays on account $200 to the City News for advertising.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,500 + 46,200 + 360 + 1,050 = 4,000 + 76,200 + 3,570 - 1,660(n) - 200 - 200
New Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660=81,910 81,910
Assets Owner's Equity
Recording Transactions
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Transaction (o): Arch Copy Co. pays wages for a part-time employee, $2,130.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 34,300 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 1,660(o) - 2,130 + 2,130
(Wages Expense)
New Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790=79,780 79,780
Assets Owner's Equity
Recording Transactions
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Transaction (p): Arch Copy Co. buys additional equipment from Melton Office Supply for $3,520, paying
$620 down, with the remaining $2,900 on account
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 32,170 + 46,200 + 360 + 1,050 = 3,800 + 76,200 + 3,570 - 3,790(p) - 620 + 3,520 + 2,900
New Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790=82,680 82,680
Assets Owner's Equity
Recording Transactions
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Transaction (q): Arch Copy Co. receives $850 cash on account from a credit customer.
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 31,550 + 49,720 + 360 + 1,050 = 6,700 + 76,200 + 3,570 - 3,790(q) + 850 - 850
New Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790=82,680 82,680
Assets Owner's Equity
Recording Transactions
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Transaction (r): Arch Copy Co. receives revenue from cash customers for the rest of the month, $4,220
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 32,400 + 49,720 + 360 + 200 = 6,700 + 76,200 + 3,570 - 3,790(r) + 4,220 + 4,220
(Income from Services)
New Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790=86,900 86,900
Assets Owner's Equity
Recording Transactions
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Transaction (s): Arch withdraws $2,500 in cash from the business for her personal living costs
= Liabilities +
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P + L. P. Arch, Capital + Revenue - ExpensesPrev. Bal. 36,620 + 49,720 + 360 + 200 = 6,700 + 76,200 + 7,790 - 3,790(s) - 2,500 -2,500
(Drawing)
New Bal. 34,120 + 49,720 + 360 + 200 = 6,700 + 73,700 + 7,790 - 3,790=84,400 84,400
Assets Owner's Equity
Recording Transactions
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Recording Transactions
= Liabilities +
=
$34,12049,720 73,700
360 7,790200 $88,190
Assets Owner's Equity
Left Side of Equals Sign Right Side of Equals Sign
CashEquip.Ppd. Ins.
Accts. Rec.
Accts. Pay.L. P. Arch, CapitalRevenue
Expenses
Cash + Equip. + Ppd. Ins. + Accts. Rec. = A/P +34,120 + 49,720 + 360 + 200 = 6,700 +
L. P. Arch, Capital
73,700+ Revenue
+ 7,790--
Expenses
3,790
$ 6,700
- 3,790
$84,400
$84,400
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A = L + OE
• Does this apply in our own everyday lives?
• Buy a car?
• Buy a house?
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What is the essence of each side?
A = L + OE
Use of Cash Source of Cash
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What is the essence of each side?
A = L + OE
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Demonstration Problem
• We will be recording business transactions for a company with the following details:
Owner name: Mai Lee
Business name: Lee Attorneys
Business type: Sole proprietorship
(one-person business)
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Demonstration Problem
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000=5,000 5,000
Owner's EquityAssets
(a) Deposited $5,000 in a bank account in the name of the business
+ +
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Demonstration Problem
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000(b) -700 +700
(Rent Expense)Bal. 4,300 = 5,000 - 700
=
Assets Owner's Equity
4,300 4,300
(b) Paid rent for the month, $700 (Rent Expense)
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Demonstration Problem
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000(b) -700 700
(Rent Expense)(c) +2,000 +2,000Bal. 4,300 + 2,000 = 2,000 + 5,000 - 700
=
Assets Owner's Equity
6,300 6,300
(c) Bought office equipment on credit, $2,000
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Demonstration Problem
(d) Sold services for cash, $3,000
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000(b) -700 700
(Rent Expense)(c) 2,000 2,000(d) +3,000 +3,000
(Income from Services)Bal. 7,300 + 2,000 = 2,000 + 5,000 + 3,000 - 700
=
Assets Owner's Equity
9,3009,300
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Demonstration Problem
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000(b) -700 700
(Rent Expense)(c) 2,000 2,000(d) 3,000 3,000
(Income from Services)(e) +4,000 +4,000Bal. 7,300 + 4,000 + 2,000 = 2,000 + 9,000 + 3,000 - 700
=
Assets Owner's Equity
13,300 13,300
(e) Mai Less invested her personal law library with a fair market value of $4,000
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Demonstration Problem
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000(b) -700 700
(Rent Expense)(c) 2,000 2,000(d) 3,000 3,000
(Income from Services)(e) 4,000 4,000(f) -1,000 -1,000Bal. 6,300 + 4,000 + 2,000 = 2,000 + 8,000 + 3,000 - 700
=
Assets Owner's Equity
12,300 12,300
(f) Mai Lee withdraws $1,000 cash for personal use
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Demonstration Problem
= Liabilities +Cash + Supplies + Law Library + Equip. = A/P + M. Lee, Capital + Revenue - Expenses
(a) 5,000 5,000(b) -700 700
(Rent Expense)(c) 2,000 2,000(d) 3,000 3,000
(Income from Services)(e) 4,000 4,000(f) -1,000 -1,000(g) +200 +200Bal. 6,300 + 200 + 4,000 + 2,000 = 2,200 + 8,000 + 3,000 - 700
=
Assets Owner's Equity
12,500 12,500
(g) Purchased supplies on credit for $200