Download Assets Liabilities Owner`s Equity

UNIT-2 (SET B)
Acct - 103
College of Business Administration,
Al-Kharj
Salman Bin Abdulaziz University
KINGDOM OF SAUDI ARABIA
Syllabus Unit - 2
Accounting System: classifications of accounts,
Double Entry system, Accounting Equations.
Steps:
1. Identify steps in classifications
account.
2. Explain double-entry rules.
3. Accounting Equations.
Debits and Credits
An Account shows the effect of transactions on a given asset,
liability, equity, revenue, or expense account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and crediting
another.
DEBITS must equal CREDITS.
Debits and Credits
Account
An arrangement that shows
the effect of transactions on
an account.
Debit = “Left”
Credit = “Right”
An Account can be
illustrated in a TAccount form.
Account Name
Debit / Dr.
Credit / Cr.
Debits and Credits
If Debit entries are greater than Credit entries, the account will
have a debit balance.
Account Name
Debit / Dr.
SR.10,000
8,000
Balance
SR.15,000
Credit / Cr.
SR.3,0
00
Debits and Credits
If Credit entries are greater than Debit entries, the account will
have a credit balance.
Account Name
Debit / Dr.
SR.10,000
Credit / Cr.
SR.3,000
8,000
Balance
SR.1,000
Debits and Credits Summary
Liabilities
Normal
Balance
Debit
Normal
Balance
Credit
Assets
Credit / Cr.
Normal Balance
Chapter
3-24
Equity
Credit / Cr.
Debit / Dr.
Debit / Dr.
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expense
Debit / Dr.
Revenue
Chapter
3-25
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-27
Credit / Cr.
Normal Balance
Chapter
3-26
Debits and Credits Summary
Balance Sheet
Asset
Debit
Credit
= Liability
Income Statement
+ Equity
Revenue
- Expense
=
Basic Accounting Equation
Relationship among the assets, liabilities and
stockholders’ equity of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
Double-Entry System Exercise
1.
Invested SR 32,000 cash and equipment valued at SR 14,000 in the
business.
Assets
+ 32,000
+ 14,000
=
Liabilities
+
Stockholders’
Equity
+ 46,000
Double-Entry System Exercise
2. Paid office rent of SR 600 for the month.
Assets
- 600
=
Liabilities
+
Stockholders’
Equity
- 600
(expense)
Double-Entry System Exercise
3. Received SR 3,200 advance on a management
consulting engagement.
Assets
+ 3,200
=
Liabilities
+ 3,200
+
Stockholders’
Equity
Double-Entry System Exercise
4. Received cash of SR 2,300 for services completed
for Shuler Co.
Assets
+ 2,300
=
Liabilities
+
Stockholders’
Equity
+ 2,300
(revenue)
Double-Entry System Exercise
5.
Purchased a computer for SR 6,100.
Assets
+ 6,100
- 6,100
=
Liabilities
+
Stockholders’
Equity
Double-Entry System Exercise
6. Paid off liabilities of SR 7,000.
Assets
- 7,000
=
Liabilities
- 7,000
+
Stockholders’
Equity
Q-6.
Classify the following items as investment by owner (I), owner’s
drawings (D), revenues (R), or expenses (E). Then indicate whether
each item increases or decreases owner’s equity:
(1) Rent Expense, (2) Service Revenue,
(3) Drawings,
(4) Salaries Expense.
Solution
2. Service Revenue is revenue (R); it increases owner’s equity.
3. Drawings is owner’s drawings (D); it decreases owner’s equity.
4. Salaries Expense is an expense (E); it decreases owner’s equity.
Q-7.
Investment By Owner. Mr.Fahad decides to open a computer programming service which
he names Soft byte. On September 1, 2008, he invests SR.15,000 cash in the business..
The effect of this transaction on the basic equation is:
Solution:
Assets
Liabilities
Owner’s Equity
Cash
Fahad Capital
SR.15,000
SR.15,000
Investment
Q-8.
Purchase of Equipment for Cash. Soft byte purchases computer equipment for SR.7,000 cash.
What is specific effect of this transaction and the cumulative effect of the first two transactions
are:
Solution:
Assets
Cash
Old Balance
New Balance
Equipment
SR.1500
SR.7000
SR.7000
SR.8000
SR.7000
.....................................
SR.15000
Liabilities
Owner’s Equity
Fahad Capital
SR.15000
SR.15000
Q.9.
Purchase of Supplies on Credit: Soft byte purchases for SR.1,600 from Acme Supply Company
computer paper and other supplies expected to last several months. Acme agrees to allow
Soft byte to pay this bill in October. What will be effect on accounting equation?
Solution:
Assets
Cash
Old bal. 8000
Supplies
--
Equipment
7000
1600
New Bal. SR.8000
SR.1600
SR.16600
Liabilities
Owner’s Equity
Account Payable
----
Fahad Capital
15000
1600
SR.7000
SR.1600
SR.15000
SR.16600
Q.10.
Services Provided for Cash. Soft byte receives SR.1,200 cash from customers for
programming services it has provided. What will be new balances in the equation ?
Solution:
Cash
Old bal. 8000
Assets
Supplies
1600
Equipment
7000
Liabilities
Owner’s Equity
Account Payable Fahad Capital
1600
15000
1200
New Bal. SR.9200
1200 reven
SR.1600
SR.17800
SR.7000
SR.1600
SR.16200
SR.17800
1.
2.
What do you mean by double entry system?
State the accounting equation, and define
assets, liabilities, and owner’s equity.
1.
2.
Performing services on account will have the following effects on
the components of the basic accounting equation:
a. increase assets and decrease owner’s equity.
b. increase assets and increase owner’s equity.
c. increase assets and increase liabilities.
d. increase liabilities and increase owner’s equity.
Which of the following statements about an account is true?
a. In its simplest form, an account consists of two parts.
b. An account is an individual accounting record of increases
and decreases in specific asset, liability, and owner’s equity
items.
c. There are separate accounts for specific assets and liabilities
but only one account for owner’s equity items.
d. The left side of an account is the credit or decrease side.
3. Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
4. A revenue account:
a. is increased by debits.
b. is decreased by credits.
c. has a normal balance of a debit.
d. is increased by credits.
5. Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings, and expenses.