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by: Sarah Donnelley

Practicce PrC

Sarah Donnelley
Midlands Technical College
GPA 3.818

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This 2 page Class Notes was uploaded by Sarah Donnelley on Sunday July 24, 2016. The Class Notes belongs to PrC at Midlands Technical College taught by PRACTICE in Summer 2016. Since its upload, it has received 32 views. For similar materials see PRACTICE in practice at Midlands Technical College.

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Date Created: 07/24/16
Accounting Concepts- August 31, 2015 Assets= Liabilities (+ Capital- drawing+ Revenues- Expenses) () = owner’s equity This is the key to accounting. Owner’s equity is made up of four accounts. Everyone struggles with normal balances (chapter 3). That’s why they struggle with the equation. I like to work these first three chapters together, because if you understand normal balances, you know why the accounts increase and decrease. If you know why it increases and decreases, it all comes together for you. Assets- what you own Liabilities- what you owe Capital- net worth, what’s left for us Add up everything you own, subtract what you owe, and that’s your equity. If you want to borrow money, apply for a credit card, that’s what they want to know. This is a game you have to learn to play. Increase your assets as much as you can in your life time. That’s where your retirement comes from. Your assets come from your cash, your investments, your house, your car, your boat, your second home (most of us don’t have, but the rich have two or three.), your 401K(contributory plans, cheaper) or your pension (less than 20% of companies have them now. They are disappearing fast. Regulations, costly). The people who made the public pension plans were ignorant. San Diego’s Budget is being ate up by unsubsidized pension. How much in investments? What companies? It’s discretionary. Depends on how you budget yourself. Brother and wife both worked, lived off his income, invested hers. Retired at 56, good pension plans, 401Ks, they can’t even spend all they’re making. Your assets list is what your portfolio lies. This is where education comes in. It’s hard work. You have to build it. What you owe- credit cards, personal loans/notes, auto loans, house loans. How you handle your liabilities determines how fast your assets grow. When we had our mini depression, some people had second loans on their homes. And then they lost their jobs. And their homes. Some exhausted their 401Ks and their pensions. Some people will be working till they die because of the mini depression. BUDGET. This is how companies survive. If you can’t pay cash, you don’t need it. If you can’t pay cash for it in 30 days, don’t buy it. Relate the accounting equation to you first, because then it’s easier to relate to the business. For the first six chapters, we’ll be looking at a service business. Assets for a business- Cash, investments (excess cash), accounts receivable, supplies, prepaid insurance, land, building, equipment, vehicles. It can be correlated to your life. Their building is the house. Their equipment is the furniture. Accounts receivable is when they provide a service on account. On account is either a service you provided (you bill or invoice the customer, they pay within 30-45 days) or they have an agreement between companies. If they have a commercial customer, they bill. The company pays within 10-30 days. IF you have accounts receivable on your books, your customers owe you. Supplies are what you operate the business with. The reason it goes on as an asset is because they buy a lot at once. Prepaid insurance- 6 months to 1 year in advance. Every month they allocate the expense. A company pays $200,000 in liability insurance at the beginning of the year, they don’t want to expend it all at once, so they do it monthly. Chapter 5- matching principle. You have to know these accounts. When you go to do a journal entry, you have to use these accounts. If you can’t do journal entries you can’t do accounting. Let’s suppose we add up all accounts and the company has $500,000 in assets. Let’s look at liabilities. Liabilities- accounts payable (what we owe our suppliers) or credit cards (they have choices, but they like accounts payable. Discounts, and no interest), Credit cards (for traveling employees), notes payable (bank loan, line of credit), Mortgage Note. Where your net worth lies, there lies the capital account. Assets are resources we need to operate the business. Page 31: Started with 2000 dollars in their business. This makes the capital go up 2000 dollars, because the equation must balance. They traded cash for equipment. Now we have $800 cash and $1200 in equipment. If you don’t want to touch the cash, you can set up an account with the vendor or you could set up a credit card. They increased the accounts payable and the equipment by 900, they now have 2900 in their assets. Owner’s equity contains four accounts, capital (started with), drawing (withdraws from the business), Revenues (money made) and Expenses (money going out). Business entity concept- you need to maintain a separate account for the business. Expenses to operate a business- rent, utilities, telephone, wages, supplies, insurance, repair. You pay the rent with cash and it comes out of expenses on the right of the equation. You’re decreasing your equity. Revenues increase your equity. Know what accounts go where. It doesn’t get easier. The sides must stay balance. Start Cengage


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