The document describes three types of business activities: 1) Service businesses that provide services to customers and have no goods inventory, with a shorter operating cycle. 2) Merchandising businesses that buy and sell goods, having only finished goods inventory and a longer operating cycle. 3) Industrial businesses that transform raw materials into finished goods, having raw materials, work-in-process, and finished goods inventory, with restaurants and bakeries as examples. The type of activity relies primarily on the business's main source of revenue.

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