accounting equation

• The accounting equation provides the underlying framework for recording and summarizing economic events.
• Assets are claimed by either creditors or owners.
• A balance sheet is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end).
• Total assets must equal total liabilities and owner’s equity.
• Claims of creditors must be paid before ownership claims.
• Assets, Liabilities, and Owner’s Equity are the components of the accounting equation.
• Resources a business owns provide future services or benefits and include cash, supplies, equipment, etc.
• Liabilities are claims against assets (debts and obligations) and include creditors, accounts payable, notes payable, etc.
• Owner’s Equity is the ownership claim on total assets and is referred to as residual equity.
• Investments by owners are the assets the owner puts into the business.
• Revenues result from business activities entered into for the purpose of earning income and common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
• An owner may withdraw cash or other assets for personal use, which is considered a decrease in Owner’s Equity.
• Expenses are the cost of assets consumed or services used in the process of earning revenue and common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
• Each transaction has a dual effect on the accounting equation.
• The ending balance in owner’s equity is needed in preparing the balance sheet.
• The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
• Companies prepare five financial statements: balance sheet, income statement, statement of changes in equity, and statement of cash flows.
• The owner’s equity statement reports the changes in owner’s equity for a specific period of time, using the same time period as the income statement.
• Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
• Softbyte receives $1,200 cash from customers for programming services it has provided.
• Softbyte receives $600 in cash from customers who had been billed for services.
• Ray Neal withdraws $1,300 in cash from the business for his personal use.
• Net income results during a time period when assets exceed liabilities.
• Softbyte pays its $250 Daily News bill in cash.
• Softbyte provides $3,500 of programming services for customers.
• Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
• The balance sheet reports the assets, liabilities, and owner’s equity at a specific date, listing assets at the top, followed by liabilities and owner’s equity.
• The income statement reports the revenues and expenses for a specific period of time, listing revenues first, followed by expenses and showing net income (or net loss).
• Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months.
• The balance sheet and income statement are needed to prepare statement of cash flows.
• Net income is needed to determine the ending balance in owner’s equity.
• The purchase is made on account.