Tutorial

Table of Contents
1 Learning Objectives

7

Transactions Increasing Owners' Equity
2 Overview

8

Transactions Decreasing Owners' Equity
3 Users of Accounting Information

9

Accounting Equation
4 Assets and Liabilities

10

Review Question 2
5 Review Question 1

11

Summary
6 Owners' Equity

12

Key Terms


Learning Objectives
After completing this tutorial you should be able to:

1. Describe accounting and its users.
2. Use the accounting equation in analyzing business transactions.

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Overview
Accounting is a system used for recording, summarizing, and communicating economic information. Decision-makers use accounting information to make decisions about the use of scarce economic resources such as money and labor.

Several typical activities are performed by all business organizations. First, businesses acquire money from investors (owners) or creditors (lenders). Financial resources are used to buy other resources such as land, equipment, and supplies. These resources are used in producing and selling goods or services. The sale of goods and services produces additional monetary resources. The accounting system analyzes, records, classifies, and stores information about such business activities.

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Users of Accounting Information
A range of people use accounting information to make decisions. Some examples are given below:

Investors provide money to businesses and expect to share in its earnings. Investors use accounting information to evaluate risk and return on investments. They need accounting information to decide whether to maintain, increase, or decrease the investment in a business.

Creditors loan money to organizations for a specific period and a specific rate of return. Potential creditors use accounting information for making loan decisions.

Managers need accounting information for decision-making. These decisions relate to the type and amount of resources to be purchased, timing of purchases, etc. Other users of accounting information include employees, customers, and suppliers.

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Assets and Liabilities
Assets are economic resources that are owned or controlled by an entity for future benefits. Examples of assets include cash, inventory (goods for resale), equipment, land, and buildings.

Liabilities are economic obligations of an organization to pay cash or transfer other resources. For example, businesses often borrow from banks or other lending institutions. These amounts must be paid to the creditors in the future. Thus a liability is recorded for the amounts owed to creditors.

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Review Question 1
Fill in the blanks. Use a term from the list given below.

Terms:

assets

creditors

investors

liabilities

  loan money to organizations for a specific period and a specific rate of return.

  provide money to businesses and expect to share in its earnings.

Amounts owed to creditors are called    .

  and assets increase when a business borrows money from a creditor.

Resources owned by a business are called    .

Cash and equipment are examples of    .

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Owners' Equity
Investors provide money or other resources to a business. Businesses obtain additional resources by selling goods and services at a profit. These profits could be distributed to owners or reinvested in the business.
Owners' equity includes the amounts originally invested and any profits reinvested in the business.

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Transactions Increasing Owners' Equity
When an owner invests money in a business, owners' equity increases. The increase in equity is matched by an increase in assets(cash).
Revenue is the price of goods sold or services sold by a business during a given period. Revenues increase the owners' equity in the business. If the business sells goods/services and collects cash, the increase in owners' equity matches the increase in cash.

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Transactions Decreasing Owners' Equity
Expenses represent the cost of resources used in producing, selling, or delivering goods and services. Examples of expenses include utilities, rent, and salaries.
Expenses cause a decrease in owners' equity. If the business pays for the resources, then the decrease in owners' equity is matched by a decrease in cash.
Owners' equity also decreases when an owner withdraws money from a business or when cash is distributed to the owners.

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Accounting Equation
The accounting equation shown below represents the relationship between an organization's assets, liabilities and owners' equity:

Assets = Liabilities + Owners' equity

Organizations need various resources for producing and selling goods/services. These are acquired with the financial resources provided by creditors (liabilities) or investors (owners' equity). This equation must remain in balance after every transaction. Thus each transaction increases or decreases both sides of the equation by equal amounts.

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Review Question 2
Fill in the blanks. Use a term from the list given below.

Terms:

assets

expense

Liabilities

Owners' Equity

Revenue

  is the price of goods or services sold in a period.

  and assets increase when a business sells goods or services.

  and assets decrease when a business repays money to a creditor.

The cost of utilities for a period is an  .

  and assets increase when a business buys equipment on credit.

Owners' equity decreases when a business incurs an  .

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Summary
Assets are resources. These are acquired with the financial resources provided by creditors (liabilities) or owners (owners' equity).

The accounting equation states that the sum of the liabilities and owners' equity equals total assets.

The accounting equation must remain in balance after every transaction. Thus each transaction increases or decreases both sides of the equation by equal amounts.

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Key Terms

Accounting Equation Liability
Asset Owners' Equity
Creditors Revenue
Expense Supplies
Investors  

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