The Accounting Equation Flashcards
What is the KEY PRINCIPLE behind the Accounting Equation?
Stuff the business owns is equal to
=
Stuff the business owes
It is important to remember that this equation always always always always balances!
$5 was invested into the popcorn company by the owner. The company now owns a cash asset, what does the company owe to the owner?
The company owes back $5.00 in Equity.
What type of accounts are:
•Cash
•Inventory
•Plant Property and Equipment
•Land & Buildings
•Investments
•Goodwill
Assets
What type of accounts are:
•Accounts Payable
•Loans
•Wages
•Taxes
Liabilities
What are the most common forms of Equity?
Stock holders, owners & retained earnings.
What provides the data for our balance sheet?
The breakdown of accounts in the form of assets equals liabilities plus equity with equal and opposite transactions.
Asset = Liabilities + Equity
Cash 5 A/P Stockholders EQ
A/R Loans Payab Own EQ 5
Inv Wages Pay R/E
known as Expanded Accounting Equation
What provides the data for the balance sheet?
The accounting equation.
Specifically the Expanded Accounting Equation.
If the company spends $5 on popcorn, where does that money go on the balance sheet?
$5 is debited to inventory account.
The category changes, but the total assets remain the same and is still in balance because there is a $5 credit in the owners equity account.
The company needs a pot. They borrow.$10 from a friend to fund the purchase. How does this affect the balance sheet?
The asset account cash would be debited $10 and the liability account loans would be credited $10.
What will happen in the balance sheet when the company buys a pot for $10?
Our asset account cash will reduce by 10 and our plant property and equipment account will increase by 10.
If the company cooks the popcorn and sells it at a 60% mark up cost and has made sales of $8. What happens in the balance sheet?
Inventory is credited by $5 to reduce it to zero. Cash is debited by $8 to increase it.
Since the company’s inventory cost was $5 and they sold the popcorn for $8, what happens to the $3 profit in the balance sheet?
The cash account is debited by $8 and the equity account Retained Earnings is credited by $3 to record a profit of
$3.
What is the Balance Sheet?
A snapshot of a businesses, assets, liabilities, and equity at a single point in time.
