THE BASIC

ACCOUNTING
EQUATION
Allbusiness transactions
can be expressed in
terms of an equation
known as the basic
accounting equation.
 ASSETS = CAPITAL/EQUITY

can be in the claimants to the

form of properties assets of the
owned and controlled business
by the business
ASSETS = LIABILITIES + CAPITAL
Remember:

DC ADE LER
 Debit Credit
Asset Liability
Draw Equity
Expense Revenue
THE CHART OF
ACCOUNTS and
FINANCIAL
STATEMENTS
 Is
a list of account
codes, starting from
assets, liabilities,
owner’s equity,
revenues and expenses.
 Alsocalled as
statement of
financial condition
or statement of
financial position.
1. It shows the firm assets, liabilities, and
net worth at a particular time or
specific date.
2. It records the categories and amount of
assets employed by the business.
3. It records obligations, claims against
the assets of the business.
4. It shows the residual claim of the
owners on the remaining assets. (Assets
– Liabilities = Net Worth)
 Are economic resources
that provide potential
future for the business.
 These are anything of
value to the business.
 Current Assets – are current and
usually those that can be converted to
cash within one year. These include
cash on hand and in the bank,
receivables, investments, goods in
stock, among others.
 Noncurrent Assets – are the
physical plant, land, buildings,
machinery, vehicles, fixtures and
furniture.
 Cash – bank deposit and cash on hand
 Accounts Receivables – business claims
from the sale of goods and services
 Notes Receivables – written promises
from the customers to pay a define sum
of money
 Building – expenses from structures
built
 Inventory – items held for resale
 Are obligations that the business must
remit to other parties, such as creditors
or employees.
 Current liabilities are amounts that
are expected to be paid within one
year, including salaries and wages,
taxes, loans, and money owed to
suppliers of goods and of services .
Some liabilities are accounts payable,
notes, payable and salaries payable.
 Alsoknown as owner’s
capital.
 Prepare T-Accounts
for the given business
accounting statement.
BUSINESS TRANSACTION:

Carolyn Wells withdrew $100,000 from personal savings and

deposited it in the new business checking account for Wells’
Consulting Services.

ANALYSIS:
a. The asset account, Cash, is increased by
$100,000.
a. The owner’s equity account, Carolyn Wells,
Capital, is increased by $100,000.

LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the left side of the T
account. Record $100,000 on the left side of the Cash T account.
RIGHT Increases to owner’s equity accounts are recorded on the right
side of the T account. Record $100,000 on the right side of the
Carolyn Wells, Capital T account.
BUSINESS TRANSACTION:

Wells’ Consulting Services issued a $5,000 check to

purchase a computer and other equipment.

ANALYSIS:
b. The asset account, Equipment, is increased by
$5,000.
b. The asset account, Cash, is decreased by $5,000.

LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the
left side of the T account. Record $5,000 on
the left side of the Equipment T account.
RIGHT Decreases to asset accounts are recorded on the
right side of the T account. Record $5,000 on
the right side of the Cash T account.
TRANSACTION:

The firm bought office equipment for $6,000 on

account from Office Plus.

ANALYSIS
c. The asset account, Equipment, is increased by
$6,000.
c. The liability account, Accounts Payable, is
increased by $6,000.

LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the
left side of the T account. Record $6,000 on the left
side of the Equipment T account.
RIGHT Increases to liability accounts are recorded on
the right side of the T account. Record $6,000 on the
right side of the Accounts Payable T account.
TRANSACTION:

Wells’ Consulting Services issued a check for $1,500 to

Office Delux Inc. to purchase office supplies.

ANALYSIS
d. The asset account, Supplies, is increased by
$1,500.
d. The asset account, Cash, is decreased by $1,500.

LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the
left side of the T account. Record $1,500 on the
left side of the Supplies T account.
RIGHT Decreases to asset accounts are recorded on the
right side of the T account. Record $1,500 on
the right side of the Cash T account.
BUSINESS TRANSACTION:

Wells’ Consulting Services issued a check in the

amount of $2,500 to Office Plus.

ANALYSIS :
e. The asset account, Cash, is decreased by $2,500.
e. The liability account, Accounts Payable, is
decreased by $2,500.

LEFT-RIGHT RULES
LEFT Decreases to liability accounts are recorded on
the left side of the T account. Record $2,500 on
the left side of the Accounts Payable T account.
RIGHT Decreases to asset accounts are recorded on the
right side of the T account. Record $2,500 on
the right side of the Cash T account.
BUSINESS TRANSACTION:

Wells’ Consulting Services issued a check for $8,000 to

pay rent for the months of December and January.

ANALYSIS
f. The asset account, Prepaid Rent, is increased by
$8,000.
f. The asset account, Cash, is decreased by $8,000.

LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the
left side of the T account.Record $8,000 on the left
side of the Prepaid Rent T account.
RIGHT Decreases to asset accounts are recorded on the
right side of the T account. Record $8,000 on the
right side of the Cash T account.
 Prepare T-Accounts
for the given business
accounting statement.
Identify the Debit and
Credit.
1. On December 1, 2016, Mr. Donald Gray started Gray Electronic Repair Services by investing
$10,000.
2. On December 5, Gray Electronic Repair Services paid registration and licensing fees for the
business, $370.
3. On December 6, the company acquired tables, chairs, shelves, and other fixtures for a total
of $3,000. The entire amount was paid in cash.
4. On December 7, the company acquired service equipment for $16,000. The company paid a
50% down payment and the balance will be paid after 60 days.
5. Also on December 7, Gray Electronic Repair Services purchased service supplies on
account amounting to $1,500.
6. On December 9, the company received $1,900 for services rendered.
7. On December 12, the company rendered services on account, $4,250.00. As per agreement
with the customer, the amount is to be collected after 10 days.
8. On December 14, Mr. Gray invested an additional $3,200.00 into the business.
9. Rendered services to a big corporation on December 15. As per agreement, the $3,400
amount due will be collected after 30 days.
10. December 22, the company collected from the customer in transaction #7.
11. On December 23, the company paid some of its liability in transaction #5 by issuing a check.
The company paid $500 of the $1,500 payable.
12. On December 25, the owner withdrew cash due to an emergency need. Mr. Gray withdrew
$7,000 from the company.
13. On December 29, the company paid rent for December, $ 1,500.
14. On December 30, the company acquired a $12,000 short-term bank loan; the entire amount
plus a 10% interest is payable after 1 year.
15. On December 31, the company paid salaries to its employees, $3,500.
1. On December 1, 2016, Mr. Donald Gray
started Gray Electronic Repair Services by
investing $10,000.
2. On December 5, Gray Electronic Repair
Services paid registration and licensing fees
for the business, $370.
3. On December 6, the company acquired
tables, chairs, shelves, and other fixtures
for a total of $3,000. The entire amount
was paid in cash.
4. On December 7, the company acquired
service equipment for $16,000. The
company paid a 50% down payment and the
balance will be paid after 60 days.
5. Also on December 7, Gray Electronic Repair
Services purchased service supplies on
account amounting to $1,500.
6. On December 9, the company received
$1,900 for services rendered.
7. On December 12, the company rendered
services on account, $4,250.00. As per
agreement with the customer, the amount
is to be collected after 10 days.
8. On December 14, Mr. Gray invested an
additional $3,200.00 into the business.
9. Rendered services to a big corporation on
December 15. As per agreement, the
$3,400 amount due will be collected after
30 days.
10. December 22, the company collected from
the customer in transaction #7.
11. On December 23, the company paid some
of its liability in transaction #5 by issuing a
check. The company paid $500 of the
$1,500 payable.
12. On December 25, the owner withdrew cash
due to an emergency need. Mr. Gray
withdrew $7,000 from the company.
13. On December 29, the company paid rent
for December, $ 1,500. Again, we will
record the expense by debiting it and
decrease cash by crediting it.
14. On December 30, the company acquired a
$12,000 short-term bank loan; the entire
amount plus a 10% interest is payable after
1 year.
15. On December 31, the company paid salaries
to its employees, $3,500.
 Another Example of
Business Transaction

 PrepareT-Accounts for the

given business accounting
statement. Identify the
Debit and Credit.
April 1 Investors provided $10,000 cash to start new business. The
business issued common stock for the investment.
2 The business borrowed $20,000 from the bank to support its
initial operations.
3 Purchased $5,000 of equipment for cash.
3 Purchased $2,000 of supplies on account.
5 Performed services from Client #1 and received immediate
payment of $7,000.
10 Performed $8,000 worth of services on account, for Client #2 and
sent invoice (customer payment due in 30 days).
17 Paid $1,200 toward account balance for supplies that were
purchased on April 3.
20 Purchased a small storage building for $4,000, paying $1,000 cash
and signing a note for the remainder.
25 Paid $250 utility bill.
28 Received partial payment of $5,000 from Client #2 for services
already performed and bill.
30 Paid $1,500 monthly rent for office space.
30 Declared and paid a cash dividend of $3,000 to
owners(investors).
April 1 Investors provided $10,000
cash to start new business.
The business issued common
stock for the investment.
2 The business borrowed
$20,000 from the bank to
support its initial
operations.
3 Purchased $5,000 of
equipment for cash.
3 Purchased $2,000 of supplies
on account.
5 Performed services from Client #1 and
received immediate payment of
$7,000.
10 Performed $8,000 worth of services
on account, for Client #2 and sent
invoice (customer payment due in 30 days).
17 Paid $1,200 toward account balance
for supplies that were purchased on
April 3.
20 Purchased a small storage building for
$4,000, paying $1,000 cash and
signing a note for the remainder.
25 Paid $250 utility bill.
28 Received partial payment of
$5,000 from Client #2 for
services already performed
and bill.
30 Paid $1,500 monthly rent for
office space.
30 Declared and paid a cash
dividend of $3,000 to
owners(investors).