Contents
Chapter 1 Assets, Liabilities, and Capital 1
Chapter 2 Debits and Credits: The Double-Entry
System 6
Chapter 3 Journalizing and Posting
Transactions 12
Chapter 4 Financial Statements 17
Chapter 5 Adjusting and Closing Procedures 24
Chapter 6 Repetitive Transactions—The Sales
and the Purchases Journals 33
Chapter 7 The Cash Journal 44
Chapter 8 Summarizing and Reporting Via
the Worksheet 49
Chapter 9 The Merchandising Company 55
Chapter 10 Costing Merchandise Inventory 61
Chapter 11 Pricing Merchandise 74
Chapter 12 Negotiable Instruments 82
Chapter 13 Controlling Cash 94
Chapter 14 Payroll 102
Chapter 15 Property, Plant, and Equipment:
Depreciation 108
Chapter 16 The Partnership 119
Chapter 17 The Corporation 126
Index 135
Chapter 1
Assets,
Liabilities,
and Capital
In This Chapter:
✔ Nature of Accounting
✔ Basic Elements of Financial
Position: The Accounting Equation
✔ Summary
✔ Solved Problems
Nature of Accounting
An understanding of the principles of bookkeeping
and accounting is essential for anyone
who is interested in a successful career in business.
The purpose of bookkeeping and accounting
is to provide information concerning the financial
affairs of a business. This information
is needed by owners, managers, creditors, and
governmental agencies.
An individual who earns a living by recording the financial activities
of a business is known as a bookkeeper, while the process of classifying
2 BOOKKEEPING AND ACCOUNTING
and summarizing business transactions and interpreting their effects
is accomplished by the accountant. The bookkeeper is concerned with techniques
involving the recording transactions, and the accountant’s objective
is the use of data for interpretation. Bookkeeping and accounting
techniques will both be discussed.
Basic Elements of Financial Position:
The Accounting Equation
The financial condition or position of a business enterprise is represented
by the relationship of assets to liabilities and capital.
Assets: Properties that are owned and have money value—for instance,
cash, inventory, buildings, equipment.
Liabilities: Amounts owed to outsiders, such as notes payable, accounts
payable, bonds payable.
Capital: The interest of the owners in an enterprise; also known as owners’
equity.
These three basic elements are connected by a fundamental relationship
called the accounting equation. This equation expresses the
equality of the assets on one side with the claims of the creditors and
owners on the other side:
Assets = Liabilities + Owner’s Equity
balance after every transaction.
The accounting equation of Assets
Owner’s Equity should
CHAPTER 1: Assets, Liabilities, and Capital 3
Example 1.1
During the month of January, Mr. Patrick Incitti, lawyer,
1. Invested $5,000 to open his law practice.
2. Bought office supplies on account, $500.
3. Received $2,000 in fees earned during the month.
4. Paid $100 on the account for the office supplies.
5. Withdrew $500 for personal use.
These transactions could be analyzed and recorded as follows:
Assets = Liabilities + Capital
Cash Incitti, Capital
1. + $5,000 = + $5,000
Supplies Accounts Payable
2. + $500 = + $500
Cash
3. + $2,000 = Fees Income
Cash + $2,000
4. − $100 = Accounts Payable
Cash − $100
5. − $500 = Incitti, Capital
− $500
Notice that for every transaction, two entries are made. After every transaction,
the accounting equation remains balanced.
Summary
1. The accounting equation is _______ = ________ + ________.
2. Items owned by a business that have monetary value are ______.
3. _________ is the interest of the owners in a business.
4. Money owed to an outsider is a(n) _________.
5. The difference between assets and liabilities is ___________.
6. An investment in the business increases _______ and ________.
7. To purchase “on account” is to create a ___________.
4 BOOKKEEPING AND ACCOUNTING
Answers: 1. Assets, liabilities, capital; 2. Assets; 3. Capital; 4. Liability;
5. Capital; 6. Assets, capital; 7. Liability
Solved Problems
Solved Problem 1.1 Given any two known elements, the third can easily
be computed. Determine the missing amount in each of the accounting
equations below.
Assets = Liabilities + Capital
(a) $7,200 = $2,800 + ?
(b) 7,000 = ? + $4,400
(c) ? = 2,000 + 4,400
(d) 20,000 = 5,600 + ?
Solution:
Assets = Liabilities + Capital
(a) $7,200 = $2,800 + $4,400
(b) 7,000 = 2,600 + $4,400
(c) 6,400 = 2,000 + 4,400
(d) 20,000 = 5,600 + 14,400
Solved Problem 1.2 Classify each of the following as elements of the
accounting equation using the following abbreviations: A = Assets; L =
Liabilities; C = Capital
(a) Land
(b) Accounts Payable
(c) Owners’ Investment
(d) Accounts Receivable
Solution:
(a) A; (b) L; (c) C; (d) A
CHAPTER 1: Assets, Liabilities, and Capital 5
Solved Problem 1.3 Determine the effect of the following transactions
on capital.
(a) Bought machinery on account.
(b) Paid the above bill.
(c) Withdrew money for personal use.
(d) Inventory of supplies decreased by the end of the month.
Solution:
(a) No effect—only the asset and liability are affected.
(b) No effect same reason.
(c) Decrease in capital—capital is withdrawn.
(d) Decrease in capital—supplies that are used represent an expense.