Accounting Equation
What is the Equation
Name 2 Assets
Cash, Supplies, Prepaid Insurance
What two accounts are affected?
Buying supplies with cash
Cash & Supplies
What account increases Owner's Equity?
Capital, Sales
Define "Transaction"
A business activity that affects the accounting equation.
What does Owner's Equity mean?
Owner’s claim to the business’ assets after liabilities are paid
Name 2 liabilities
Examples: Accounts Payable, Notes Payable
What two accounts are affected and how?
Transaction: Received cash from Sales.
Cash increases (Asset), Sales increase (Revenue → OE increases)
What does an expense do?
Expenses decrease OE
Must the equation always balance?
Yes—every transaction must leave the equation in balance
Transaction: Received cash from owner as an investment, $500.00 — what account(s) increases?
Increase Asset: Cash +$500, Increase OE: Capital +$500
What kind of account is "Capital"?
Capital is Owner’s Equity
What two accounts are affected and how?
Transaction: Received cash from owner as an investment.
Cash increases, Capital increases = both sides of equation increase
Sales = revenue or expense?
Revenue
What two accounts are affected:
Transaction: Paid cash for insurance.
Cash decreases (Asset), Prepaid Insurance increases (Asset) → still balanced
If liabilities increase, what else must happen?
Liabilities increase → must either increase assets or decrease equity to stay balanced
What happens when you pay off Accounts Payable?
Cash decreases, Accounts Payable decreases (a liability); both decrease and equation stays balanced
What two accounts are affected and how?
Transaction: Paid cash for rent.
Rent Expense increases (decreases OE), Cash decreases (asset)
Rent, insurance – asset or expense?
Expenses like Rent and Insurance are not assets; they are costs (so Expenses)
Accounts Payable definition.
Money owed to creditors/vendors.
How does a drawing affect the equation?
Drawing decreases OE;
What does prepaid insurance affect?
Prepaid Insurance is an Asset—it represents a future benefit
What two accounts are affected and how?
Transaction: Paid cash to owner for personal use.
Cash decreases (Asset), Drawing increases (reduces OE)
Why track expenses carefully?
Answers may vary—examples include utilities, rent, salaries, advertising, etc.
Real-life business expense examples
Answers vary—examples: rent, internet, insurance, advertising