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Chapter 1

The Accounting Equation and Double-entry Bookkeeping

会计等式和复式记账法

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Three primary financial

statements.

Introduction to Financial StatementsIntroduction to Financial Statements

Income Statement

Balance Sheet

Statement of Cash Flows

We will use a sole proprietorship to describe these statements.

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Statement of Financial Position: A Starting Point

Statement of Financial Position: A Starting Point

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

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Assets(资产 )Assets(资产 )

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Assets are economic resources

that are owned by the business and

can be measured in monetary term.

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Liabilities(负债 )Liabilities(负债 )

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Liabilities are debts that a

business owes its creditors.

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Owner’s Equity(所有者权益 )Owner’s Equity(所有者权益 )

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Owner’s equity represents the

owner’s claim to the net assets of

the business.

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Owner’s EquityOwner’s Equity

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Net assets

Net worth

Capital

Proprietorship

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Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

Vagabond Travel AgencyBalance Sheet

December 31, 2001Assets Liabilities & Owner's Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owner's EquityOffice equipment 15,000 Terry Crane, capital 220,000 Total 300,000$ Total 300,000$

The Accounting Equation会计等式

The Accounting Equation会计等式

Assets = Liabilities + Owner’s Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owner’s Equity

$300,000 = $80,000 + $220,000

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Exercise in classExercise in class

II. Problems:1(on page 33).

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Let’s analyze some transactions for Guangli servic

e!

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Accounts Payable(应付账款）Accounts Payable(应付账款）Accounts Payable is the debt that the business

owes its supplier for the goods or services provided.

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Prepaid Insurance（预付保险费）Prepaid Insurance（预付保险费）Prepaid Assets are the resources paid for

before receiving the actual benefits.

e.g. insurance /advertisement fee

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Accounts（账户）Accounts（账户）The basic recording unit of accounting

information

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Revenue(收入）Revenue(收入）Revenues are the amounts of assets that a

business earns as a result of selling goods or rendering service in form of receiving the credit card receipts or check or receivable.

Receivables are the amounts owed to a business by customers.

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Expense（费用）Expense（费用）Expenses are the amounts of assets that a business

uses up in the process of generating revenues which reduce the owner’s equity.

e.g. utility fee (electricity and water bill), payroll

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Difference between expenses and prepaid assets

Difference between expenses and prepaid assets

Expense: the payment is made after the use of assets.

Prepaid assets: the payment is made before the use of the assets.

Prepaid assets should be transferred into expense when the relevant asset is used up.

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Question oneQuestion one

Mr. Li paid 2000 yuan for the office rent of the month. Is that a kind of expense ?

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Owner’s Equity(所有者权益 )Owner’s Equity(所有者权益 )

Revenue Expense

Changes in Owner’s Equity

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Double-entry Bookkeeping(复式记账法 )

Double-entry Bookkeeping(复式记账法 )

Assets = Liabilities + Owner’s Equity

An accounting system by which each transaction is recorded in at least two accounts and the accounting equation is still kept in balance.

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Accounting EquationAccounting Equation

Assets = Liabilities + Owner’s Equity

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The Use of AccountsThe Use of Accounts

Increases are recorded on one side of the T-account, and decreases are recorded on the other side.

Left or

Debit Side

Right or

Credit Side

Title of Account

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Cash(现金 )Cash(现金 )

(a) 1000000

(f) 2000

100200

(b) 360000

(c) 200000

(d) 9000

(e) 3600

(g) 200

572800

Cash

FootingsBal. 429 200

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Let’s use the previous information and see how debits and credits are recorded in the Cash account for Guangli servi

ces.

Let’s use the previous information and see how debits and credits are recorded in the Cash account for Guangli servi

ces.

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AA = LL + OEOEASSETSASSETS

Debit for

Increase

Credit for

Decrease

EQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

LIABILITIESLIABILITIES

Debit for

Decrease

Credit for

Increase

Debit and Credit Rules(借贷记账法 )

Debit and Credit Rules(借贷记账法 )

Debits and credits affect accounts as follows:

Debits and credits affect accounts as follows:

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LiabilitiesLiabilities EquityEquityAssetsAssets = +

Each account has a normal balance.Each account has a normal balance.

Normal BalancesNormal Balances

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Debits and Credits for Revenue and Expense

Debits and Credits for Revenue and Expense

EQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

REVENUESREVENUES

Debit for

Decrease

Credit for

Increase

EXPENSESEXPENSES

Credit for

Decrease

Debit for

Increase

Expenses decrease owner’s equity.

Revenues increase owner’s equity.

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Normal BalancesNormal Balances

Each account has a normal balance.Each account has a normal balance.

RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital + _

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Account Receivable (应收账款）Account Receivable (应收账款）Receivable includes all the money claimed against

people, organizations, or other debtors when a business provides the service or sells the merchandise.

e.g. Notes Receivable / Accounts Receivable

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Drawing Drawing

Asset withdrawn from an business by its owners for their personal use.

e.g. You are the owner of a small business. The mortgage payment on your home is due, but you have little money in your personal checking account. Therefore, you write a check for this payment from your business bank account.

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Investments and Withdrawals by the Owner

Investments and Withdrawals by the Owner

EQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

JILL JONES, CAPITALJILL JONES, CAPITAL

Debit for

Decrease

Credit for

Increase

JILL JONES, DRAWINGJILL JONES, DRAWING

Credit for

Decrease

Debit for

Increase

An owner’s withdrawals

decrease owner’s equity.

An owner’s investments

increase owner’s equity.

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Each account has a normal balance.Each account has a normal balance.

RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

_ + _

Continue

Normal BalancesNormal Balances

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RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

_ + _

Normal BalancesNormal Balances

Each account has a normal balance.Each account has a normal balance.

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AA +E+D= L+C+R+C+R

Double Entry AccountingThe Equality of Debits and Credits

Double Entry AccountingThe Equality of Debits and Credits

Debit balances

Credit Credit balancesbalances=

In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

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Trial Balance 试算平衡表Trial Balance 试算平衡表

A list of all the account balances at a given point of time in the following order: assets, liabilities, owner’s equity, revenue and expenses.

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AssignmentsAssignments

Problems 3, page 33

A4 paper

Better to use pencil