Very Brief Notes on chapter 1- these are not a substitute of the notes and

questions – they may only be helpful notes

Assets – Resources owned by the business – items owned or controlled by the
business – they can be current assets- short term such as
Cash
Accounts receivable (AR) – promise to receive cash in the future from
customers because the company provided a service for them on account or sold
them merchandise inventory on account – these are short term and are to be
received in less than a year and hold no interest or exact maturity date

Note receivable (NR) - promise to receive cash in the future because the
company loaned cash to others– these are either short term (current) or long
term – non-current depending on the maturity date. NR have a maturity date- we
know exact date of receipt- are written meaning they are backed up by a
promissory note and they hold interest so the company will receive both the
principal amount plus interest – if the maturity date to receive cash is more than
a year form balance sheet date they are non-current and if the maturity date to
receive cash is less than a year from balance sheet date, they are current

Merchandise Inventory – these are assets owned by the company to sell again
Supplies – are assets owned by company to use in less than a year such as
stationery
Prepaid expenses- such as prepaid rent, prepaid salary- these are current assets
when the company pays for an expense in advance before it is incurred such as
paying the rent for December in November- in advance- before it is incurred –
we’ll see more on this in chapters 2 and 3. Prepaid rent and prepaid salary for
example are not expenses but current assets as they were paid for in advance
before being incurred. To be recorded as an expense, the expense must be
incurred- meaning we are paying for a past benefit such as paying for the
salaries of December at the end of December or paying the rent for March at the
end of March but paying the expense in advance creates a current asset named
prepaid expense which is an asset
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Assets can be non-current-long term – these are assets owned to be used in

more than a year such as Land, building, machine, equipment, vehicles,
 furniture….these are called Plant assets because they are tangible and have
a physical substance

Liabilities
Items the business owes- must be paid back – these are the claims of outsiders
against the assets of the companies
Accounts payable (AP) – promise to pay cash in the future to suppliers and
creditors because the company purchased merchandise inventory or supplies
from them on account- these are short term and are to be paid in less than a year
and hold no interest or exact maturity date

Note payable (NP) - promise to pay cash in the future because the company
borrowed cash from bank or others– these are either short term (current) or long
term – non current depending on the maturity date. NP have a maturity date, are
written meaning they are backed up by a promissory note and they hold interest
so the company will pay both the principal amount plus interest – if the maturity
date to pay cash is more than a year form balance sheet date they are non-
current and if the maturity date to pay cash is less than a year from balance
sheet date, they are current
Expense payable such as salary payable, rent payable, utility payable- these
are called accrued expenses and arise when an expense is incurred but not paid
yet such as salaries of March at the end of march not paid- the salary expense
here is incurred – it is a past benefit-and must be recorded but cash is not paid
so it will not decrease but the liability salary payable will increase.
Unearned Revenue – these are not revenues – a Revenue is earned and must be
recorded when the service is PROVIDED – already provided the service to
customer- or already sold and delivered the merchandise inventory to customer
– but what if the company received cash in advance from a customer before
providing a service – they received 10,000 cash before providing a service- here
the cash increased but this is not a revenue as no service is provided yet – here
we say cash increased and unearned revenue increased which is a liability – will
see more of this in chapter 2.
Equity (capital)- residual interest of owners’ in the business – owners’ claim
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against the assets of the business – beginning capital increases by revenues and
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decreases by expenses and withdrawals – contributions from owners (assets

invested or contributed by the owner) increase the beginning capital
 Any time the company provided a service or sold merchandise inventory –
this means we have a Revenue increased such as service revenue if service is
provided. Now id service provided and cash received – the service revenue
increases and cash as well increases but if service provided on account- then
service revenue increases and accounts receivable- asset- not cash will increase.
Remember in accounting equation when service revenue increases beginning
capital under equity increases in the accounting equation
When an expense increases- beginning capital under equity decreases in the
accounting equation
Withdrawals- are when the owner of the business withdraws cash or any other
asset from the business for their own personal use – in this case withdrawals
increase and not expenses as when the owner withdraws cash for personal use,
this is not an expense for the business
Remember- when withdrawals increase – the beginning capital under equity
decreases in the accounting equation

The accounting equation ay beginning of period

Beginning assets= beginning liabilities + beginning capital (equity)

Beginning capital + Revenues – expenses – withdrawals + contribution from the

owner= ending capital
The accounting equation at year end is
Ending assets= ending liabilities + ending capital (equity)
The accounting equation at year end is also the balance sheet as we saw
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 The financial statements
Income statement = reports the performance or results of business over a
period of time
Shows
Revenues- Expenses= Net income or net loss
Statement of owners’ equity – shows the changes in capital over a period-
how beginning capital changed to be ending capital

Beginning capital+ contribution from owner+ net income or minus net loss
(revenues- expenses)- withdrawals of owners= ending capital (ending
capital will appear in the balance sheet)

Balance sheet- or statement of financial position—it reports the position of

the company at a specific date
It shows the
Assets of the company at one side (assets at end of period) and liabilities at
end of period and ending capital at the other side- the assets must equal the
liabilities and the ending capital – in other words it reported the accounting
equation at the end of the period
The cash flow statement – it shows the business cash receipts and payments
over a period of time

Remember

Every transaction in accounting has two sides – if has two impacts on the
accounting equation – for example the left hand side – assets-if it increases
the right hand side must increase (liabilities and equity) or there must be
an equal decrease in the assets side so the accounting equation remains
equal and in balance. Or if assets decrease, there must be an equal increase
in assets or an equal decrease in liabilities and equity so the accounting
equation remains in balance.
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 For example

The business paid utility expense $500

Utility expense will increase (in accounting equation this is reduced from
beginning capital) and cash decreases as well

The business received utility bill of $500 and will pay later
Utility expense will increase (in accounting equation this is reduced from
beginning capital) as the expense is incurred as bill is received so it is for the
past but here cash will not decrease as not paid- utility payable (a liability) will
increase

Provided a service and received cash or provided a service on account

Provided the service means that service revenue increases (in accounting
equation this is added to beginning capital as revenues increase beginning
capital) now if cash is received the cash will increase but if on account the
accounts receivable will increase instead

The business purchased supplies and paid cash or purchased supplies on

account
When supplies purchased they increase (an asset) if purchased and paid the cash
will decrease but if purchased on account no cash will decrease but a liability
accounts payable will increase instead

The owner withdrew cash from business

Withdrawals will increase here (but in accounting equation remember
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withdrawals are deducted (reduced) from beginning capital in equity) and cash
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will decrease
 The owner invested cash or a machine in the business
The cash or machine assets will increase and the Capital will increase – assets
provided or invested by the owner- the owner contributions increase the capital)

The company in January paid the salaries of February $2,500 in advance

Here the salaries paid for February were paid in advance and not at the end of
February so we are not paying for a past benefit – these are not expense as they
are not incurred- not a past benefit- so here prepaid salary will increase which is
an asset and cash will decrease an asset as well – SALARY EXPENSE DID
NOT INCREASE HERE AS IT IS NOT INCURRED

The Company paid April salaries of $2,500 on April 30

Here salary expense increased (this is reduced from beginning capital in the
accounting equation)– this is an expense as it is incurred – a past benefit- and
cash decreases as well
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