BASIC ACCOUNTING EQUATION STUDY OBJECTIVE 6 Assets = Liabilities + Owner’s Equity The Accounting Equation 1-3 Assets = Liabilities + Owner’s Equity The resources owned by a business 3 The Accounting Equation 1-3 Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business 4 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners 5 OWNER’S EQUITY AS A BUILDING BLOCK Owner’s Equity = total assets minus total liabilities. (A - L = O.E.) Owner’s Equity represents the ownership claim to total assets. Subdivisions of Owner’s Equity: 1 Capital or Investments by Owner (+) 2 Drawing (-) 3 Revenues (+) 4 Expenses (-) INVESTMENTS BY OWNERS AS A BUILDING BLOCK Investments • are the assets the owner puts in the business • increase owner’s equity DRAWINGS AS A BUILDING BLOCK Drawings • are withdrawals of cash or other assets by the owner for personal use • decrease owner’s equity REVENUES AS A BUILDING BLOCK Revenues • gross increases in owner’s equity from business activities entered into for the purpose of earning income • may result from sale of merchandise, services, rental of property, or lending money • usually result in an increase in an asset EXPENSES AS A BUILDING BLOCK Expenses • decreases in owner’s equity that result from operating the business • cost of assets consumed or services used in the process of earning revenue • examples: utility expense, rent expense, supplies expense, and tax expense INCREASES AND DECREASES IN OWNER’S EQUITY INCREASES Investments by Owner Revenues DECREASES Owner’s Equity Withdrawals by Owner Expenses TRANSACTION IDENTIFICATION PROCESS STUDY OBJECTIVE 6 1-3 Example Exercise 1-2 Asep Sunarya is the owner and operator of Pasti Sukses, a motivational consulting business. At theaccounts end of its accounting Decembertrial 31, 2007, Pastiof Sukses has The following appear inperiod, the adjusted balance assets of Rp800,000,000 and liabilities of Rp350,000,000. Using the accounting Hindsight Consulting. Indicate whether each account would be equation, determine the following amounts: reported in the (a) current asset; (b) property, plant, and a. Owner’s(c) equity, as of liability, December(d) 31,long-term 2007. equipment; current liability; or (e) b. Owner’s equity, as of of December 31, 2008, assuming assets sheet owner’s equity section the December 31, 2007,that balance increased by Rp130,000,000 and liabilities decreased by Rp25,000,000 of Hindsight Consulting. during 2008. Follow My Example 1-2 a. A = L + OE Rp800,000,000 = Rp350,000,000 + OE OE = Rp450,000,000 b. A = L + OE Rp130,000,000 = –Rp25,000,000 + OE OE = Rp155,000,000 OE on Dec. 31, 2008: Rp605,000,000 (Rp450,000,000+Rp155,000,000) 36 13 1-4 @solusinet On November 1, 2007, Cinta Cita begins a business that will be known as SolusiNet. 14 1-4 Assets Cash a. 25,000,000 = = Owner’s Equity Cinta Cita, Capital 25,000,000 Investment by Cinta Cita a. Cinta Cita deposits Rp25,000,000 in a bank account in the name of SolusiNet 40 15 1-4 (in Rp000) Assets Cash + Land Bal. 25,000 b. –20,000 +20,000 Bal. 5,000 20,000 = = Owner’s Equity Cinta Cita, Capital 25,000 25,000 b. SolusiNet exchanged Rp20,000,000 for land. 41 16 1-4 (in Rp000) Assets Cash + Supplies + Land Bal. 5,000 c. Bal. = Accounts Cinta Cita, Payable Capital 20,000 +1,350 5,000 1,350 Owner’s Liabilities + Equity = 25,000 +1,350 20,000 1,350 25,000 c. During the month, SolusiNet purchased supplies for Rp1,350,000 and agreed to pay the supplier in the near future (on account). 42 17 1-4 Beginning with entry (d) the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide. 18 1-4 (in Rp000) Assets Cash + Supplies + Land Bal. d. Bal. 5,000 1,350 20,000 1,350 20,000 +7,500 12,500 d. SolusiNet provided services to customers, earning fees of Rp7,500,000 and received the amount in cash. 44 19 1-4 (in Rp000) Liabilities + Accounts Payable 1,350 1,350 Owner’s Equity Cinta Cita, Fees +Capital + Earned 25,000 +7,500 25,000 7,500 Bal. d. Bal. d. SolusiNet provided services to customers, earning fees of Rp7,500,000 and received the amount in cash. 45 20 Expenses 1-4 The amounts used in earning revenue are called expenses. Adding expenses to the owner’s equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 48, 50, 52, and 54. The bottom row in these four slides provides the balances after each transaction. 21 1-4 (in Rp000) Assets Cash + Supplies + Land Bal. e. 12,500 –3,650 1,350 20,000 Bal. 8,850 1,350 20,000 e. SolusiNet paid the following expenses: wages, Rp2,125,000; rent, Rp800,000; utilities, Rp450,000; and miscellaneous, Rp275,000. 47 22 1-4 (in Rp000) Liabilities + Owner’s Equity Accounts Cinta Cita, Fees Wages Rent Utilities Misc. Payable + Capital + Earned Expense Expense Expense Expense 1,350 25,000 7,500 1,350 25,000 7,500 –2,125 –2,125 –800 –800 –450 –450 e. SolusiNet paid the following expenses: wages, Rp2,125,000; rent, Rp800,000; utilities, Rp450,000; and miscellaneous, Rp275,000. –275 e. –275 48 23 1-4 (in Rp000) Assets Cash + Supplies + Land Bal. f. 8,850 –950 1,350 20,000 Bal. 7,900 1,350 20,000 f. SolusiNet paid Rp950,000 to creditors during the month. 49 24 1-4 (in Rp000) Liabilities + Owner’s Equity Accounts Cinta Cita, Fees Wages Rent Utilities Misc. Payable + Capital + Earned Expense Expense Expense Expense –800 –450 –275 1,350 25,000 7,500 –2,125 –950 400 f. 25,000 7,500 –2,125 –800 –450 f. NetSolutions paid Rp950,000 to creditors during the month. –275 50 25 1-4 (in Rp000) Assets Cash + Supplies + Land Bal. g. 7,900 1,350 –800 20,000 Bal. 7,900 550 20,000 g. At the end of the month, the cost of supplies on hand is Rp550,000, so Rp800,000 of supplies were used. 51 26 1-4 (in Rp000) Liabilities + Owner’s Equity Accounts Cinta Cita, Fees Wages Rent Supplies Util. Misc. Payable + Capital + Earned Exp. Exp. Exp. Exp. Exp. 400 25,000 7,500 –2,125 –800 –450 –275 g. –800 400 25,000 7,500 –2,125 –800 –800 g. At the end of the month, the cost of supplies on hand is Rp550,000, so Rp800,000 of supplies were used. –450 –275 52 27 1-4 (in Rp000) Assets Cash + Supplies + Land Bal. h. 7,900 –2,000 550 20,000 Bal. 5,900 550 20,000 h. At the end of the month, Cinta withdrew Rp2,000,000 in cash from the business for personal use. 53 28 1-4 (in Rp000) Liabilities + Owner’s Equity Accounts Cinta Cita, Cinta Cita Fees Wages Payable + Capital + Drawing Earned Exp. 400 25,000 7,500 –2,125 Rent Supplies Util. Misc. Exp. Exp. Exp. Exp. –800 –800 –450 –275 h. –2,000 400 25,000 –2,000 7,500 –2,125 –800 –800 –450 h. At the end of the month, Cinta withdrew Rp2,000,000 in cash from the business for personal use. –275 54 29 1-4 Owner’s Equity Increased by Decreased by Owner’s investments Owner’s withdrawals Revenues Expenses 55 30 2-1 Accounting systems are designed to show the increases and decreases in each financial statement item as a separate record. This record is called an account. 2-1 The T Account Title The T account has a title. 5 2-1 Title Debit Credit Amounts entered on the left side are debits. 8 2-1 Title Debit Credit Amounts entered on the right side are credits. 9 2-1 (In Rp 000) Cash (a) (d) 25,000 (b) 7,500 (e) (f) (h) Balance 20,000 3,650 950 2,000 5,900 Balance of the account 10 2-1 A group of accounts for a business entity is called a ledger. 2-1 A list of the accounts in a ledger is called a chart of accounts. 2-1 Assets are resources owned by the business entity. • • • • Cash Supplies Prepaid expenses Buildings 2-1 Liabilities are debts owed to outsiders (creditors). • Accounts payable • Notes payable • Wages payable 2-1 Owner’s equity is the owner’s right to the assets of the business. A drawing account represents the amount of withdrawals by the owner. 2-1 Revenues are increases in owner’s equity as a result of selling services or products to customers. • Fees earned • Commission revenue • Rent revenue 2-1 The using up of assets or consuming services in the process of generating revenues results in expenses. • Wages expense • Rent expense • Miscellaneous expense Balance Sheet Accounts @solusinet (a) On November 1, Cita Cinta opens a new business and deposits Rp. 25,000,000 in a bank account in the name of SolusiNet. 2-1 2-1 Page 1 JOURNAL Date 1 2 3 Description 2007 Nov. 1 Cash P.R. Debit Credit 25 000 000 Cita Cinta, Capital 25 000 000 Invested cash in SolusiNet. 4 23 2-1 The effect of this entry is shown in the accounts of SolusiNet as follows: Cash Cita Cinta, Capital Nov. 1 25,000 Nov. 1 (In Rp 000) 25,000 2-1 @solusinet (b) On November 5, SolusiNet bought land for Rp 20,000,000 paying cash. 2-1 5 Land 20 000 000 Cash 20 000 000 Purchased land for building site. 26 2-1 @solusinet (c) On November 10, SolusiNet purchased supplies on account for Rp1,350,000 2-1 10 Supplies Accounts Payable 1 350 000 1 350 000 Purchased supplies on account. 28 2-1 @solusinet (f) On November 30, SolusiNet paid creditors on account, Rp. 950,000 2-1 30 Accounts Payable Cash 950 000 950 000 Paid creditors on account. 30 2-1 Balance Sheet Accounts Debits Asset accounts……. Liability accounts.… Owner’s equity (capital) accounts… Credits Increase (+) Decrease (-) Decrease (-) Increase (+) Decrease (-) Increase (+) 31 2-1 Balance Sheet Accounts Asset Accounts Debit for increases (+) Liability Accounts Credit for decreases (–) Debit for decreases (–) Credit for increases (+) Owner’s Equity Accounts Debit for decreases (–) Credit for increases (+) 32 2-1 Example Exercise 2-1 Prepare a journal entry for the purchase of a truck on June 3 for Rp.42,500, 000 paying Rp.8,500,000 cash and the remainder on account. Follow My Example 2-1 June 3 Truck Cash Accounts Payable For Practice: PE 2-1A, PE 2-1B Rp. 42,500,000 8,500,000 34,000,000 33 Income Statement Accounts @solusinet (d) On November 18, SolusiNet received fees of Rp7,500,000 from customers for services provided. 2-1 2-1 30 Cash 7 500 000 Fees Earned 7 500 000 Received fees from customers. 35 2-1 @solusinet (e) Throughout the month, SolusiNet incurred the following expenses: wages, Rp. 2,125,000; rent Rp. 800,000; utilities, Rp. 450,000; and miscellaneous, Rp.275,000. 2-1 30 Wages Expense 2 125 000 Rent Expense 800 000 Utilities Expense 450 000 Miscellaneous Expense 275 000 Cash 3 650000 Paid expenses. 37 2-1 @solusinet (g) On November 30, a count revealed that Rp.800,000 of the supplies inventory had been used during the month. 2-1 30 Supplies Expense Supplies 800 000 800 000 Supplies used during November. 39 2-1 Income Statement Accounts Debits Revenue accounts… Expense accounts… Decrease (-) Increase (+) Credits Increase (+) Decrease (-) 40 2-1 Income Statement Accounts Revenue Accounts Debit for decreases (–) Less Credit for increases (+) Expense Accounts Debit for increases (+) Credit for decreases (–) 41 Continued 2-1 @solusinet (h) On November 30, Cita Cinta withdrew Rp.2,000,000 in cash from SolusiNet for personal use. 2-1 2007 Nov 30 Cita Cinta, Drawing Cash 2 000 000 2 000 000 Cita Cinta withdrew cash for personal use. 46 2-2 @solusinet Dec. 1 SolusiNet paid a premium of Rp.2,400,000 for a comprehensive insurance policy covering liability, theft and fire. The policy covers a one-year period. 2-2 (In Rp. 000) 57 2-2 @solusinet Dec. 1 SolusiNet paid rent for December, Rp.800,000. The company from which SolusiNet is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month. 2-2 1 Rent Expense Cash 52 11 800 000 800 000 Paid rent for December. 59 2-2 An alternative approach is to debit Rent Expense for Rp.800,000 on December 1. This avoids having to transfer the balance to an expense account at the end of the month. 2-2 SolusiNet received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. SolusiNet agreed to rent the land to the retailer for three months, with the rent payable in advance. 2-2 @solusinet Dec. 1 SolusiNet receives Rp. 360,000 for three month’s rent for use of its land beginning December 1. 1 Cash 11 Unearned Rent 23 360 000 360 000 Received advance payment for three months’ rent on land. 62 2-2 @solusinet Dec. 4 4 SolusiNet purchased office equipment on account from PD.Tunas Jaya. for Rp.1,800,000 Office Equipment Accounts Payable 18 1 800 000 21 1 800 000 Purchased office equipment on account. 63 2-2 @solusinet Dec. 6 SolusiNet paid Rp.180,000 for a newspaper advertisement. 6 Miscellaneous Expense Cash 59 11 180 000 180 000 Paid for newspaper ad. 64 2-2 @solusinet Dec. 11 SolusiNet paid creditors Rp.400,000 11 Accounts Payable Cash 21 11 400 000 400 000 Paid creditors on account. 65 2-2 @solusinet Dec. 13 SolusiNet paid a receptionist and part-time assistant Rp.950,000 for two weeks’ wages. 13 Wages Expense Cash 51 11 950 000 950 000 Paid two weeks’ wages. 66 2-2 @solusinet Dec. 16 SolusiNet received Rp.3,100,000 from fees earned for the first half of December. 16 Cash 11 Fees Earned 41 3 100 00 3 100 00 Received fees from customers. 67 2-2 @solusinet Dec. 16 Fees earned on account totaled Rp.1,750,000 for the first half of December. 16 Accounts Receivable Fees Earned 12 41 1 750 000 1 750 000 Recorded fees earned on account. 68 2-2 @solusinet Dec. 20 20 SolusiNet paid Rp.900,000 to Executive Supply Co. on the Rp.1,800,000 debt owed from the December 4 transaction. Accounts Payable Cash 21 11 900 000 900 000 Paid part of amount owed to Executive Supply Co. 69 2-2 @solusinet Dec. 21 SolusiNet received Rp.650,000 from customers in payment of their accounts. 21 Cash 11 Accounts Receivable 12 650 000 650 000 Received fees from customers on account. 70 2-2 @solusinet Dec. 23 SolusiNet paid Rp 1,450,000 for supplies. 23 Supplies Cash Purchased supplies. 14 11 1 450 000 1 450 000 71 2-2 @solusinet Dec. 27 SolusiNet paid the receptionist and part-time assistant Rp.1,200,000 for two weeks’ wages. 27 Wages Expense Cash 51 11 1 200 000 1 200 000 Paid two weeks’ wages. 72 2-2 @solusinet Dec. 31 NetSolutions paid Rp.310,000 for telephone charges for the month. 31 Utilities Expense Cash 54 11 310 000 310 000 Paid telephone charges. 73 2-2 @solusinet Dec. 31 SolusiNet paid Rp.225,000 for electric usage for the month. Page 1 JOURNAL Date Description Post. Ref. Debit 54 225 000 Credit 2007 Dec 31 Utilities Expense Cash 11 225 000 Paid for electric usage. 74 2-2 @solusinet Dec. 31 SolusiNet received Rp.2,870,000 from fees earned for the second half of December. 31 Cash 11 Fees Earned 41 2 870 000 2 870 000 Received fees from customers. 75 2-2 @solusinet Dec. 31 NetSolutions earned Rp.1,120,000 on account for the second half of December. 31 Accounts Receivable Fees Earned 12 41 1 120 000 1 120 000 Recorded fees earned on account. 76 2-2 @solusinet Dec. 31 Cita Cinta withdrew Rp.2,000,000 for personal use. 31 Cita Cinta, Drawing Cash 32 11 2 000 000 2 000 000 Cita Cinta withdrew cash for personal use. 77 2-3 Cash Account Receivable Supplies Prepaid Insurance Land Office Equipment Account Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Suppliexpense Miscellaneous Expense 2 2 2 2 20 1 4 4 1 42 SolusiNet Unadjusted Trial Balance 31-Dec-07 In Rp. Debit Credit Balances Balances 0 6 5 000 2 2 0 000 0 0 0 000 4 0 0 000 0 0 0 000 8 0 0 000 9 0 0 000 3 6 0 000 25 0 0 0 000 0 0 0 000 16 3 4 0 000 2 7 5 000 6 0 0 000 9 8 5 000 8 0 0 000 4 5 5 000 6 0 0 000 42 6 0 0 000 82 2-4 Objective 4 Discover and correct errors in recording transactions. 2-4 A transposition occurs when the order of the digits is changed mistakenly, such as writing Rp.542,000 as Rp.452,000 or Rp.524,000. In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing RP.542.000 as $54,200. 2-4 Another type of error is a posting error. Assume that on May 5 a Rp.12,500,000 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for Rp.12,500,000. 2-4 Entry to Correct Error May 31 Office Equipment Supplies 18 12 500 000 14 12 500 000 To correct erroneous debit to Supplies on May 5. See invoice from Bella Office Equipment Company. 88
