‫)‪Sheet (2‬‬

‫‪Fundamental of Accounting‬‬
‫‪First year‬‬
‫‪Edited by/ Dr. magdy kamel‬‬
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‫وتس اضيفك‬
‫‪Tel/ 01273949660‬‬
‫مكتبة الباشمحاسب – شارع المكتبات‬
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 Basic Accounting Equation
Assets = liabilities + Owner's equity
Assets ‫االصول او ممتلكات المشروع‬
 Assets are resources a business owns ‫االصول هى ممتلكات المشروع‬
 the common characteristic possessed by all assets is the capacity to Provide
future services or benefits.
 Cash, supplies, equipment, inventory, etc

Liabilities ‫االلتزامات او ديون الشركة‬

 Liabilities are claims against assets (that is existing debts and obligations)
 All of these person to whom ownes money are its creditors.
 Accounts payable, notes payable, etc

Owner's equity )‫حقوق الملكية (صافى الثروة‬

 Ownership claim on total assets
 Referred to as residual equity ‫حقوق ملكية متبقية‬
 Investment by owners and revenue (+)
 expenses, drawing (-)

increases in owner's equity

1. Investments by owner are the assets the owner puts into the business.
‫استثمار المالك هى االصول التى يضعها المالك داخل المشروع‬
2. Revenues are the gross increase in owner's equity resulting from business
activities entered into for the purpose of earning income.
‫ ينتج االيراد عندما تقوم بخدمه اوعمل بغرض تحقيق ربح‬:‫االيرادات‬

Common sources of revenue are: sales, fees, services, commissions,

interest, dividends, royalties, and rent

Decrease in owner's equity

1. Drawings An owner may withdraw cash or other assets for personal use.
‫ يجوز المالك سحب فلوس من الشركة‬: ‫مسحوبات شخصية‬
‫لالستخدام الشخصى‬

2. Expenses are the cost of assets consumed or services used in the

process of earning revenue.

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 ‫ هى تكلفة االصول المستهلكة او خدمات مستخدمة فى‬: ‫المصورفات‬
‫عملية تحقيق الربح‬

Common expenses are: salaries expense, rent expense, utilities expense, tax exp, etc

Example (1) lecture

Ray Neal decides to open a computer programming service which he names Data Care
1. he invests $15,000 cash in the business
2. purchases computer equipment for $7,000 cash.
3. purchase of supplies for $1,600 on credit
4. Service provided to some customer for $1,200 cash
5. receives a bill for $250 from the Daily News for advertising but payment until a
later date.
6. service provided $3,500 of which $1,500 collected in cash & the remaining balance
on accounts.
7. pays store rent $600, salaries of employees $900, and utilities $200.
8. payment $250 Daily News bill in cash
9. receives $600 in cash from customers who had been billed for services
[in Transaction (6)]
10. withdraws $1,300 in cash from the business for his personal use

Solution
Assets liabilities Owner's equity
Date Cash + Accounts + Supplies + Equipment + Accounts + Capital - Drawing + Revenue – Expense
Receivable payable
1. +15,000 +15,000
2. - 7,000 +7,000
Balance 8,000 7,000 15,000
3. +1,600 + 1,600
Balance 8,000 1,600 7,000 1,600 15,000
4. +1,200 +1,200
Balance 9,200 1,600 7,000 1,600 15,000 1,200
5. + 250 - 250
Balance 9,200 1,600 7,000 1,850 15,000 1,200 250
6. + 1,500 + 2,000 + 3,500
Balance 10,700 2,000 1,600 7,000 1,850 15,000 4,700 250
7. - 1,700 - 600
- 900
- 200
Balance 9,000 2,000 1,600 7,000 1,850 15,000 4,700 $ 1,950
8. - 250 - 250
Balance 8,750 2,000 1,600 7,000 1,600 15,000 4,700 1,950
9. + 600 - 600
Balance 9,350 1,400 1,600 7,000 1,600 15,000 4,700 1,950

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 10. - 1,300 - 1,300
Balance 8,050 1,400 1,600 7,000 1,600 15,000 1,300 4,700 1,950

18,050 18,050
Data Care
Income statment
For the month ended September 30,2020
Revenue
 Service revenue ……………………………………………. 4,700
Expenses
 Salaries expense ………………………………… $900
 Rent expense …………………………………….. 600
 Advertising expense ………………………….. 250
 Utilities expense ………………………………… 200
Total expenses ………………………………………………. (1,950)
Net income ……………………………………………………. 2,750

Notes
 Reports the revenues and expenses for a specific period of time.
 Net income: revenues exceed expenses
 Net loss: expenses exceed revenues

Data Care
Owner's equity statement
For the month ended September 30, 2020
R. Neal, capital September 1 ………………………….. –0–
Add: inventments …………………………………. 15,000
Net income ………………………………….. 2,750 17,750
17,750
Less: drawings ………………………………………………….. (1,300)
R.Neal, capital, September 30 ………………………….. 16,450

Notes:

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  Statement of owner's equity indicates the reasons why owner's equity has
increased or decreased during the period.

Data Care
Balance sheet
September 30,2020
Assets
 Cash ……………………………………………………… 8,050
 Accounts receivable ……………………………… 1,400
 Supplies ……………………………………………….. 1,600
 Equipment ……………………………………………. 7,000
Total assets …………………………………………………... 18,050
Liabilities and owner's equity
Liabilities
 Accounts payable …………………………………. 1,600
Owner's equity
 R. Neal, capital ……………………………………… 16,450
Total liabilities and owner's equity 18,050

Example (2)
Presented below is selected information related to Flanagan Company at December
31, 2010. Flanagan reports financial information monthly.

Office Equipment $10,000 Utilities Expense $ 4,000

Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Drawings 5,000

(a) Determine the total assets of Al Fairoze Company at December 31, 2022.
(b) Determine the net income that Al Fairoze Company reported for December 2022.
(c) Determine the owner’s equity of Al Fairoze Company at December 31, 2022
Solution
(a)

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  Cash $8,000
 Accounts Receivable $9,000
 Office Equipment $10,000
The total assets $27,000

(b)

Net income is $14,000, computed as follows:

Revenues
 Service revenue ……………………….. $36,000

Expenses
 Rent expense $11,000
 Wages expense 7,000
 Utilities expense 4,000
Total expenses …………………………………….. (22,000)
Net income ………………………………………… $14,000

(c) The ending owner’s equity of Al Fairoze Company is $8,500.

By rewriting the accounting equation,
we can compute owner’s equity as assets minus liabilities, as follows:

Total assets [as computed in (a)] $27,000

Less: Liabilities
 Notes payable $16,500
 Accounts payable 2,000 18,500

Owner’s equity $ 8,500

Note that
it is not possible to determine the company’s owner’s equity in any other way,
because the beginning total for owner’s equity is not provided

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Example (3)
For the following accounts please indicate wether the normal balance is a debit or a
credit
a. sales c. office supplies
d. retained earnings e. accounts receivable
f. prepaid insurance h. wages payable
i. building j. wages expense
answer
a. credit c. debit
d. credit e. debit
f. debit h. credit
i. debit j. debit
Question (3)
Use the expanded accounting equation to answer each of the following questions:

a) the liabilities of EL assuit company are $90,000. EL Assuit's capital accounts is

$150,000; drawings are $40,000; revenue is $450,000; revenue and expenses
$320,000. What is the amount of EL Assuit company's total assuits?
Solution
 Assets = Liabilities + Capital + Revenue – Expenses – Drawings
 Total assets = 90,000 + 150,000 + 450,000 – 320,000 – 40,000 = 330,000

(b) The total assets of Pereira Company are $57,000. Karen Perry's capital account is
$25,000; drawings are $7,000; revenues, $50,000; and expenses, $35,000.What is the
amount of the company's total liabilities?
Solution
 Assets = liabilities + owner's equity – drawings + revenues – expenses
 $57,000 = Liabilities + $25,000 - $7,000 + $50,000 - $35,000
 57,000 = liabilities + 33,000
 Liabilities = $57,000 – 33,000 = $24,000

(c) The total assets of Yap Co. are $600,000 and its liabilities are equal to
two-thirds of its total assets. What is the amount of Yap Co.'s owner's equity?
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Solution
 Assets = liabilities + owner's equity
 $600,000 = $400,000 + owner's equity
 Owner's equity = 600,000 – 400,000 = $200,000

True or false
1. Private accountants are accountants who are not employees of business enterprise

2. To possess future service potential, an asset must have physical substance.

3. Owners' claims to total business assets take precedence over the claims of creditors
because owners invest assets in the business and are liable for losses.

4. The basic accounting equation states that Assets = Liabilities.

5. The basic accounting equation is in balance when the creditor and ownership claim
against the business equal the assets.

6. External transactions involve economic events between the company and some
other enterprise or party.

7. In the owner's equity statement, revenues are listed first, followed by expenses,
and net income (or net loss).

8. The purchase of office equipment on credit increases total assets and total liabilities

9. The primary purpose of the statement of cash flows is to provide information about

the cash receipts and cash payments of a company during a period.

10. Net income for the period is determined by subtracting total expenses and
drawings from total revenues.

11. The hiring of a new company president is an economic event recorded by the
financial information system.

12. Financial statements are the major means of communicating accounting

information to interested parties.

1. F 2. F 3. F 4. F 5. T 6. T 7. F
8. T 9. T 10. F 11. F 12. T
Multi choose questions (MCQ)
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1. Collection of a $500 Accounts Receivable
a. increases an asset $500; decreases an asset $500.
b. increases an asset $500; decreases a liability $500.
c. decreases a liability $500; increases owner's equity $500.
d. decreases an asset $500; decreases a liability $500

2. The Ryder’s Uptown Grill received a bill of $400 from the Erml Advertising Agency.
The owner, John Ryder, is postponing payment of the bill until a later date. The effect
on specific items in the basic accounting equation is
a. a decrease in Cash and an increase in Accounts Payable.
b. a decrease in Cash and an increase in J. Ryder, Capital.
c. an increase in Accounts Payable and a decrease in J. Ryder, Capital.
d. a decrease in Accounts Payable and an increase in J. Ryder, Capital.

3. James Company purchases $600 of equipment from Mundelein Inc. for cash. The
effect on the components of the basic accounting equation of James Company is
a. an increase in assets and liabilities.
b. a decrease in assets and liabilities.
c. no change in total assets.
d. an increase in assets and a decrease in liabilities

4. At October 1, Bennington Enterprises reported owner’s equity of $35,000. During

October, the owner made additional investments of $2,000 and the company earned
net income of $6,000. If owner’s equity at October 31 totals $40,000, what amount of
owner drawings were made during the month?
a. $0
b. $3,000
c. $4,000
d. $5,000

5. At October 1, Bennington Enterprises reported owner’s equity of $35,000. During

October, the owner made additional investments of $5,000 and the company posted
a net loss of $3,000. If owner’s equity at October 31 totals $35,000, what amount of
owner drawings were made during the month?
a. $0
b. $2,000
c. $3,000
d. $5,000

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6. Ironton Company’s owner’s equity at the beginning of August 2008 was $300,000.
During the month, the company earned net income of $60,000 and owner’s drawings
were $20,000. At the end of August 2008, what is the balance in owner’s equity?
a. $260,000 b. $300,000
c. $340,000 d. $380,000

7. On January 1, 2008, Jackson Company reported owner’s equity of $470,000. During

the year, the owner withdrew cash of $20,000. At December 31, 2008, the balance in
owner’s equity was $500,000. What amount of net income or net loss would the
company report for 2008?
a. Net income of $30,000
b. Net loss of $50,000
c. Net income of $10,000
d. Net income of $50,000

8. The balance sheet is frequently referred to as

a. an operating statement.
b. the statement of financial position.
c. the statement of cash flows.
d. the statement of owner's equity

9. A balance sheet shows

a. revenues, liabilities, and owner's equity.
b. expenses, drawings, and owner's equity.
c. revenues, expenses, and drawings.
d. assets, liabilities, and owner's equity.

10. An income statement

a. summarizes the changes in owner's equity for a specific period of time.
b. reports the changes in assets, liabilities, and owner's equity over a period of
time
c. reports the assets, liabilities, and owner's equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

11. Net income results when

a. Assets > Liabilities.
b. Revenues = Expenses.
c. Revenues > Expenses.
d. Revenues < Expenses.
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12. If an individual asset is increased, then
a. there must be an equal decrease in a specific liability.
b. there must be an equal decrease in owner's equity.
c. there must be an equal decrease in another asset.
d. none of these is possible.

13. If services are rendered for credit, then

a. assets will decrease.
b. liabilities will increase.
c. owner's equity will increase.
d. liabilities will decrease.

14. If expenses are paid in cash, then

a. assets will increase.
b. liabilities will decrease.
c. owner's equity will increase.
d. assets will decrease

15. Owner's equity is increased by

a. drawings.
b. revenues.
c. expenses.
d. liabilities.

16. Owner's equity is decreased by

a. assets.
b. revenues.
c. expenses.
d. liabilities

17. The basic accounting equation may be expressed as

a. Assets = Equities.
b. Assets + Liabilities = Owner's Equity.
c. Assets = Liabilities + Owner's Equity.
d. all of these.

18. If total liabilities increased by $15,000 and owner’s equity increased by $5,000
during a period of time, then total assets must change by what amount and direction
during that same period?

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 a. $20,000 decrease
b. $20,000 increase
c. $25,000 increase
d. $30,000 increase

19. If total liabilities decreased by $15,000 and owner’s equity increased by $5,000
during a period of time, then total assets must change by what amount and direction
during that same period?
a. $20,000 increase
b. $10,000 decrease
c. $10,000 increase
d. $15,000 decrease

20. As of June 30, 2024, Abu Ghaly Company has assets of $100,000 and owner’s
equity of $5,000. What are the liabilities for Abu Ghaly Company as of June 30, 2024?
a. $85,000
b. $90,000
c. $95,000
d. $100,000

21. Revenues are:

a. the cost of assets consumed during the period.
b. gross increases in owner's equity resulting from business activities.
c. the cost of services used during the period.
d. actual or expected cash outflows.

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