1. Types of Activities
Services
• A company
provides services
to customers
• There is no
goods.
• Shorter operating
cycle.
• For example :
Teaching,
transportation
and barbers .
Merchandising
• A company buys
and sells goods.
• Only one type of
inventory called
Finished goods.
• Longer operating
cycle.
• For example :
Supermarkets
Industrial
• A company
transforms raw
materials into
finished goods.
• There are 3 types
of inventory (Raw
materials-Work in
process-Finished
goods).
• For example:
Restaurants and
bakeries.
Note : The type of the activity rely basically on “the primary source of revenue”
2. = +
LEARNING
OBJECTIVE
State the accounting equation, and define its
components.
3
LO 2
Basic Accounting Equation
Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
If a business is liquidated, claims of creditors must be paid
before ownership claims.
Assets Liabilities Owner's Equity
3. = +
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Basic Accounting Equation
Assets Liabilities Owner's Equity
4. = +
Basic Accounting Equation
Liabilities
Claims against assets (debts and obligations).
Creditors (party to whom money is owed).
Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.
Owner's Equity
Assets Liabilities
5. Owner's Equity
Ownership claim on total assets.
Referred to as residual equity.
Investment by owners and revenues (+)
Drawings and expenses (-).
= +
Basic Accounting Equation
Owner's Equity
Assets Liabilities
6. Increases in Owner’s Equity
Investments by owner are the assets the owner puts into the
business.
Revenues result from business activities entered into for the
purpose of earning income.
► Common sources of revenue are: sales, and services.
Owner’s Equity Illustration 1-6
Expanded accounting
equation
7. Decreases in Owner’s Equity
Drawings An owner may withdraw cash or other assets for
personal use.
Expenses are services used in the process of earning revenue.
► Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Owner’s Equity Illustration 1-6
Expanded accounting
equation
8. Liabilities & Owner’s Equity
Assets
Current Liabilities
Accounts payable
Notes payable
Non-Current Liabilities
Loan payable
Bonds payable
Current Assets
Cash
Bank
Accounts receivable
Notes receivable
Inventories
Owner’s Equity
Capital
Non-Current Assets
Equipment
Land
Buildings
Cars
Furniture
