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Bank Reconciliation

A company's general ledger account Cash contains a record of the transactions(checks written, receipts from customers, etc.) that involve its checking account. The bank also creates a record of the company's checking account when it processes thecompany's checks, deposits, service charges, and other items. Soon after each monthends the bank usually mails a bank statement to the company. The bank statement liststhe activity in the bank account during the recent month as well as the balance in the bank account.

When the company receives its bank statement, the company should verify that theamounts on the bank statement are consistent or compatible with the amounts in thecompany's Cash account in its general ledger and vice versa. This process of confirmingthe amounts is referred to as reconciling the bank statement, bank statement 

reconciliation, bank reconciliation, or doing a "bank rec." The benefit of reconcilingthe bank statement is knowing that the amount of Cash reported by the company(company's books) is consistent with the amount of cash shown in the bank's records.

Because most companies write hundreds of checks each month and make manydeposits, reconciling the amounts on the company's books with the amounts on the bank statement can be time consuming. The process is complicated because some itemsappear in the company's Cash account in one month, but appear on the bank statementin a different month. For example, checks written near the end of August are deductedimmediately on the company's books, but those checks will likely clear the bank account in early September. Sometimes the bank decreases the company's bank accountwithout informing the company of the amount. For example, a bank service chargemight be deducted on the bank statement on August 31, but the company will not learnof the amount until the company receives the bank statement in early September. From

these two examples, you can understand why there will likely be a difference in thebalance on the bank statement vs. the balance in the Cash account on the company's

books. It is also possible (perhaps likely) that neither balance is the true balance. Both balances may need adjustment in order to report the true amount of cash.

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After you adjust the balance per bank to be the true balance and after you adjust thebalance per books to also be the same true balance, you have reconciled the bank statement. Most accountants would simply say that you have done the bank reconciliation or the bank rec.

The Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank 

We will demonstrate the bank reconciliation process in several steps. The first step is toadjust the balance on the bank statement to the true, adjusted, or corrected balance. The

items necessary for this step are listed in the following schedule:

Step 1. Balance per Bank Statement on Aug. 31, 2008Adjustments:

Add: Deposits in transitDeduct: Outstanding checksAdd or Deduct: Bank errors

 Adjusted/Corrected Balance per Bank

Deposits in transit are amounts already received and recorded by the company, but are

not yet recorded by the bank . For example, a retail store deposits its cash receipts of August 31 into the bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit.

Because deposits in transit are already included in the company's Cash account, there isno need to adjust the company's records. However, deposits in transit are not yet on the bank statement. Therefore, they need to be listed on the bank reconciliation as an

increase to the balance per bank in order to report the true amount of cash.

A helpful rule of thumb is "put it where it isn't." A deposit in transit is onthe company's books, but it isn't on the bank statement. Put it where itisn't: as an adjustment to the balance on the bank statement .

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Outstanding checks are checks that have been written and recorded in the company'sCash account, but have not yet cleared the bank account. Checks written during the lastfew days of the month plus a few older checks are likely to be among the outstandingchecks.

Because all checks that have been written are immediately recorded in the company'sCash account, there is no need to adjust the company's records for the outstandingchecks. However, the outstanding checks have not yet reached the bank and the bank statement. Therefore, outstanding checks are listed on the bank reconciliation as adecrease in the balance per bank .

Recall the helpful tip "put it where it isn't." An outstanding check is onthe company's books, but it isn't on the bank statement. Put it where itisn't: as an adjustment to the balance on the bank statement.

Bank errors are mistakes made by the bank. Bank errors could include the bank recording an incorrect amount, entering an amount that does not belong on a company's bank statement, or omitting an amount from a company's bank statement. The companyshould notify the bank of its errors. Depending on the error, the correction couldincrease or decrease the balance shown on the bank statement . (Since the company didnot make the error, the company's records are not changed.)

Step 2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the company'sCash account so that it is the true, adjusted, or corrected balance. Examples of the itemsinvolved are shown in the following schedule:

Step 2. Balance per Books on Aug. 31, 2008Adjustments:

Deduct: Bank service charges

Deduct: NSF checks & feesDeduct: Check printing chargesAdd: Interest earnedAdd: Notes Receivable collected by bankAdd or Deduct: Errors in company's Cash account

 Adjusted/Corrected Balance per Books

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Bank service charges are fees deducted from the bank statement for the bank's processing of the checking account activity (accepting deposits, posting checks, mailingthe bank statement, etc.) Other types of bank service charges include the fee chargedwhen a company overdraws its checking account and the bank fee for processing a stop

payment order on a company's check. The bank might deduct these charges or fees on

the bank statement without notifying the company. When that occurs the companyusually learns of the amounts only after receiving its bank statement.

Because the bank service charges have already been deducted on the bank statement,there is no adjustment to the balance per bank. However, the service charges will haveto be entered as an adjustment to the company's books. The company's Cash accountwill need to be decreased by the amount of the service charges.

Recall the helpful tip "put it where it isn't." A bank service charge isalready listed on the bank statement, but it isn't on the company's books.Put it where it isn't: as an adjustment to the Cash account on thecompany's books.

An NSF check is a check that was not honored by the bank of the person or companywriting the check because that account did not have a sufficient balance. As a result, thecheck is returned without being honored or paid. (NSF is the acronym for not sufficientfunds. Often the bank describes the returned check as a return item. Others refer to the

 NSF check as a "rubber check" because the check "bounced" back from the bank onwhich it was written.) When the NSF check comes back to the bank in which it wasdeposited, the bank will decrease the checking account of the company that haddeposited the check. The amount charged will be the amount of the check plus a bank fee.

Because the NSF check and the related bank fee have already been deducted on the bank statement, there is no need to adjust the balance per the bank. However, if thecompany has not yet decreased its Cash account balance for the returned check and the

 bank fee, the company must decrease the balance per books in order to reconcile.

Check printing charges occur when a company arranges for its bank to handle thereordering of its checks. The cost of the printed checks will automatically be deductedfrom the company's checking account.

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Because the check printing charges have already been deducted on the bank statement,there is no adjustment to the balance per bank. However, the check printing chargesneed to be an adjustment on the company's books. They will be a deduction tocompany's Cash account.

Recall the general rule, "put it where it isn't." A check printing charge ison the bank statement, but it isn't on the company's books. Put it where itisn't: as an adjustment to the Cash account on the company's books.

Interest earned will appear on the bank statement when a bank gives a companyinterest on its account balances. The amount is added to the checking account balance

and is automatically on the bank statement. Hence there is no need to adjust the balance per the bank statement. However, the amount of interest earned will increase the balancein the company's Cash account on its books.

Recall "put it where it isn't." Interest received from the bank is on the bank statement, but it isn't on the company's books. Put it where it isn't:as an adjustment to the Cash account on the company's books.

Notes Receivables are assets of a company. When notes come due, the company mightask its bank to collect the note receivable. For this service the bank will charge a fee.The bank will increase the company's checking account for the amount it collected(principal and interest) and will decrease the account by the collection fee itcharges.Since these amounts are already on the bank statement, the company must becertain that the amounts appear on the company's books in its Cash account.

Recall the tip "put it where it isn't." The amounts collected by the bank 

and the bank's fees are on the bank statement, but they are not on thecompany's books. Put them where they aren't: as adjustments to the Cashaccount on the company's books.

Errors in the company's Cash account result from the company entering an incorrectamount, entering a transaction that does not belong in the account, or omitting a

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transaction that should be in the account. Since the company made these errors, thecorrection of the error will be either an increase or a decrease to the balance in the Cashaccount on the company's books.

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books

(Step 2), the two adjusted amounts should be equal. If they are not equal, you mustrepeat the process until the balances are identical. The balances should be the true,correct amount of cash as of the date of the bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2).Adjustments to increase the cash balance will require a journal entry that debits Cashand credits another account. Adjustments to decrease the cash balance will require acredit to Cash and a debit to another account.

Q&A: Bank Reconciliation

» What does debit memo mean on a bank statement?

» How does one prepare a company's first bank statement reconciliation?

» What is meant by reconciling an account?

» How do you record a check that clears the bank months after it was voided?

» What adjustment is needed when a check that was written in a previous month appears

on the current month's bank statement?

» What is an unpresented cheque or check and does it require an adjustment to the

balance sheet?

» Is an entry made for outstanding checks when preparing a bank reconciliation?

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» How many days after a month ends should the bank reconciliation be done?

» What are some reasons that cause the balance on the bank statement to differ from the

cash balance on the books?

» When does a negative cash balance appear on the balance sheet?

Bank Reconciliation Banks send statements to their depositors each month. A bank reconciliation compares the information inthe bank statement with the company's Cash account, and finds any discrepancies. These are recorded or 

dealt with as needed. The process is fairly simple.

The bank balance and book Cash balance are listed on a piece of paper (now we often use computers).Some items show up on the bank statement, but have not been reflected in the books yet. These items will be added to or subtracted from the book balance.

Some transactions have been recorded in the books, but have not yet cleared the bank. These includedeposits in transit, which are not yet posted in the bank's records - those made after the date of the bank statement. And outstanding checks - those which have been written and mailed, but haven't cleared the bank yet. These items are added to or subtracted from the bank balance. 

Once all items have been included, the adjusted bank and book balances should be equal. If they are not,the reconciliation needs to be reviewed and corrected until the two amounts are equal. 

Bank Reconciliation

Adjustments to Bank Balance Adjustments to Book Balance

Add Deposits in transitAdd anything on bank statement that increases cash balance, but has not been recorded in the books: bank collections, interest earned

Subtract Outstanding checksSubtract anything on bank statement that decreases cash balance, but has not been recorded in the books: bank charges and fees, bad checks, interest charges

Bank errors (add or subtract as needed); notify bank of error; these don't happen very often, butwe need to watch for them

Add or subtract for accounting errors relating to deposits or checks.

Do not record any of these adjustments in the books.

These adjustments must be entered as journal entries, sothe books agree with the bank balance.

 Welcome to MiddleCity - Online Accounting Tutorial 

Cash Flow Statement

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The terms "Cash Flow Statement" and "Statement of Cash Flows" areinterchangeable.

The Cash Flow Statement is relatively easy to prepare. It is better to use logic and"common sense" to understand what is happening and how information should be presented in this statement.

The Income Statement and Balance Sheet are both prepared using AccrualAccounting. This involves making a combination of adjustments to the books,including accruals, deferrals, apportioning costs such as depreciation, and charging

Income with future expenditure such as warranty claims and post-retirement benefits. Every time we make an adjustment in the books and records, the resultingfinancial statements comply with accrual accounting, but are also farther away fromcash accounting.

Before 1987 we prepared a third financial statement called the Statement of 

Changes in Financial Position. This was generally prepared on a Working Capital basis, but could also be prepared on a Cash Flow basis.

In 1987 FASB mandated the use of the Cash Flow Statement, in place of theStatement of Changes. The Statement of Cash Flows removes all accruals, deferrals

and other non-cash adjustments, and provide investors and creditors withinformation about a company's Sources and Uses of Cash. An Income Statementmight show a Profit or a Loss, but that says nothing about how the company'sManagement managed the company's money.

Today this is more important than every. Managers are frequently caught "cookingthe books," hiding losses and liabilities, overstating or understating Income, all for the purpose of influencing the market price of company stock. Managers frequently benefit personally from increases in company stock prices, so there is a highincentive for these people to manipulate information.

The Cash Flow Statement is fairly simple.There are only 3 sections, which reportIncreases and Decreases in Cash. The sections are always presented in thefollowing order.

Operating Cash Flows -Inflows - Money received from customers for sales of products or services.Outflows - Money paid to suppliers, employees, etc. for normal business expenses.

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Investing Cash Flows -Inflows - Money received from selling assets, including land, buildings equipment,stocks, bonds. Money received from loans made to others, such as NotesReceivable.

Outflows - Money paid to purchase assets; and money paid out to make loans toothers.

Financing Cash Flows -Inflows - Money received from stockholders purchasing company stock, from bondholders for bonds payable, and money borrowed from banks and other creditors.Outflows - Money paid to stockholders for dividends, to bondholders, banks andother creditors.

The Statement of Cash Flows also reconciles the Cash balance from the beginning

to end of the year. The beginning and ending Cash balances can be found on theBalance Sheet.

Direct and Indirect Method There are 2 ways to present the Statement of Cash Flows - Direct and Indirect.Your textbook presents the Direct Method. The Indirect Method is illustrated in theappendix at the end of the chapter. FASB recommends the use of the DirectMethod. A recent survey of company shows the following:

Companies using the Direct Method 5%Companies using the Indirect Method 95%

Despite these statistics, most accounting textbooks teach the Direct Method.Youshould also note that when the Direct Method is used, the statement must alsoinclude a supplemental calculation of Operating Cash Flows using the IndirectMethod. Accountants should be able to do both methods.

Preparing the Statement of Cash Flows I generally include the cash flow worksheet as part of my 13-column trial balanceworksheet. I use the space in the far right side of the trial balance worksheet to

analyze cash flows for all accounts. Calculate the difference between the beginningand ending balances for all accounts, and determine if the change reflects anincrease or decrease in cash flow. Mark each account with and O for Operatingcash flows, I for Investing cash flows and F for Financing cash flows.

 Next lay out the general format of the statement on a piece of paper or spreadsheet.I generally identify the Investing and Financing activites first, and put them in theappropriate place. There should only be a few items that fall in these categories.

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Most of the accounts will be Operating activities. These include all Income andExpense accounts - the majority of accounts on the trial balance.

You may need to look at a few Ledger accounts. For instance, the company may

have purchased Land and also sold Land in the same year. The purchases would beoutflows of cash, and recorded as Debits in the Land account. Sales would beinflows of cash, and recorded as Credits in the Land account.

Land

 Date  Description  Debit  Credit Balance

1/1/04 Beginning balance forward 100,000

3/17/04 Purchase of Land 30,000 130,0009/12/04 Sale of Land 20,000 110,000

Let's analyze the Land account 

Beginning balance 100,000

Ending balance 110,000

Increase in Land 10,000

If the Land was sold and purchased for Cash, there would be a net decrease in Cashof $10,000, but really we have an Outflow of $30,000 for the purchase of Land, andan Inflow of $20,000 from the sale of Land.

Let's assume the Cash account looks like this for these transactions....

Cash

 Date  Description  Debit  Credit Balance

-

3/17/04 Purchase of Land (cash outflow) 30,000 -

9/12/04 Sale of Land (cash inflow) 20,000 -

[Cash balance is irrelevant]

The Investing section of the Cash Flow statement would look like this:

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Investing Cash Flows 

Cash Inflows:

Sale of Land $20,000

Cash Outflows:

Purchase of Land (30,000)

Net Cash used for Investing activities $(10,000)

 

Analyzing the Cash Flow Statement Analyzing cash flows is an important part of financial statement analysis. Here aresome important things to look for:

1. There should be a net Increase in Cash from Operating Activities. If operationsdon't produce positive cash flows, the business will soon be in trouble. Withoutadequate operating cash flows, the company may have to dip into cash reserves or sell investments to meet regular payment of expenses.

2. If a company shows net Increase in Investing Cash Flows, it means they areselling off assets. That is generally not a good sign. I would also look to see if tehcompany was posting losses and had negative cash flows from Operating activities.This might indicate that Management is selling off assets to pay bills. Moreanalysis is needed in this case.

© 1999-2006 Copyright Malcolm E. White, Fulton, Missouri, USA For personal educational use only. All rights reserved. No part of this tutorial may be reproduced or stored in any way without permission. 

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Basic Financial StatementsThe accounting process Financial Statements The Accounting Equation 

Chart of Accounts 

Chapter 2 introduces you to the basic financial statements used to communicate a company's financial information to outsiders - parties ot

han the company's directors and managers, who are the "insiders." 

What is a financial statement? What does it tell us? Why should we care? 

T hese are good questions and they deserve an answer.

A business is a financial entity separate from its owners. Each business must keep financial records. A number of feder

and state laws require this. But even if there were no laws, it would still be a good idea anyway. Businesses provide vitgoods and services to those living in the community. They provide jobs for people, and tax dollars that improve our road parks and schools. It is in everyone's best interest that our community's businesses be successful. 

B usiness owners take a risk. What if no one wants to buy their goods or services? The owner has spent time and money to start a business

urchased land, buildings and equipment, hired people to work in the business.... all this done with the hope that the business will beuccessful. And if the business is NOT a success, the owner may have lost his or her life's savings, workers must find jobs, and creditors mo unpaid. 

F inancial information may not make a business successful, but it helps the owner make sound business decisions. It can also help a bank o

reditor evaluate the company for a loan or charge account. And the IRS will be interested in collecting the appropriate amount of income to financial information will serve many purposes.

F inancial information comes in many forms, but the most important are the Financial Statements. They summarize relevant financial

nformation in a format that is useful in making important business decisions. If this were not possible, the whole process would be a wastime. Too much information may be equally useless. Financial statements summarize a large number of Transactions into a small number oignificant categories. To be useful, information must be organized. 

Quick Quiz The financial statements of a business entity:A) Include the balance sheet, income statement, and income tax return.B) Provide information about the profitability and financial position of the company.C) Are the first step in the accounting process.D) Are prepared for a fee by the Financial Accounting Standards Board.

Click for answers 

Financial statements have generally agreed-upon formats and follow the same rules of disclosure. This puts everyone on the same level pla

ield, and makes it possible to compare different companies with each other, or to evaluate different year's performance within the sameompany. There are three main financial statements: 

1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows 

Each financial statement tells it's own story. Together they form a comprehensive financial picture of the company, the results of its

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perations, its financial condition, and the sources and uses of its money. Evaluating past performance helps managers identify successfultrategies, eliminate wasteful spending and budget appropriately for the future. Armed with this information they will be able to makeecessary business decisions in a timely manner. 

The accounting process in a nutshell: 

) Capture and Record a business transaction, ) Classify the transaction into appropriate Accounts, ) Post transactions to their individual Ledger Accounts, ) Summarize and Report the balances of Ledger Accounts in financial statements. 

There are 5 types of Accounts. ) Assets ) Liabilities ) Owners' Equity (Stockholders' Equity for a corporation) ) Revenues

 ) Expenses 

All the accounts in an accounting system are listed in a Chart of Accounts. They are listed in the order shown above. This helps us preparinancial statements, by conveniently organizing accounts in the same order they will be used in the financial statements.

Financial Statements The Balance Sheet lists the balances in all Asset, Liability and Owners' Equity accounts.

The Income Statement lists the balances in all R evenue and Expense accounts. 

The Balance Sheet and Income Statement must accompany each other in order to comply with GAAP. Financial statements presentedeparately do not comply with GAAP. This is necessary so financial statement users get a true and complete financial picture of the compa

All accounts are used in one or the other statement, but not both. All accounts are used once, and only once, in the financial statements. ThBalance Sheet shows account balances at a particular date. The Income Statement shows the accumulation in the Revenue and Expenseccounts, for a given period of time, generally one year. The Income Statement can be prepared for any span of time, and companies oftenrepare them monthly or quarterly. 

t is common for companies to prepare a Statement of Retained Earnings or a Statement of Owners' Equity, but one of these statement is noequired by GAAP. These statements provide a link between the Income Statement and the Balance Sheet. They also reconcile the Owners

Equity or Retained Earnings account from the start to the end of the year. 

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The Statement of Cash Flows is the third financial statement required by GAAP, for full disclosure. The Cash Flow statement shows thenflows and outflows of Cash over a period of time, usually one year. The time period will coincide with the Income Statement. In fact, accalances are not used in the Cash Flow statement. The accounts are analyzed to determine the Sources (inflows) and Uses (outflows) of casver a period of time. 

There are 3 types of cash flow (CF):

) Operating - CF generated by normal business operations ) Investing - CF from buying/selling assets: buildings, real estate, investment portfolios, equipment. ) Financing - CF from investors or long-term creditors 

The SEC (Securities and Exchange Commission) requires companies to follow GAAP in their financial statements. That doesn't meanompanies do what they are supposed to do. Enron executives had millions of reasons ($$) to falsify financial information for their ownersonal gain. Auditors are independent CPAs hired by companies to determine whether the rules of GAAP and full disclosure are beingollowed in their financial statements. In the case of Enron and Arthur Andersen, auditors sometimes fail to find problems that exist, and inome cases might have also failed in their responsibilities as accounting professionals. 

The Accounting Equation 

You may have heard someone say "the books are in balance" when referring to a company's accounting records. This refers to the use of thouble-entry system of accounting, which uses equal entries in two or more accounts to record each business transaction. Because the dollamounts are equal we say the transaction is "in balance." You can think of it like an old two pan balance scale, which measures things inollars, instead of pounds.

Double-entry accounting follows one simple rule, called the accounting equation. It is a simple algebraic equation, expressed as an equali= MC2 OOPS! That's not it.

The Accounting Equation really is: 

Assets =Liabilities +

Owners' Equity

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another way to think about it everything we own = who provided the financing

Remember in Chapter 1, I told you that each transaction describes both an object and form of financing. In the accounting equation, Assethe objects, and are on the Left side of the equation. Financing activities are on the Right side of the equation. Liabilities represent borrowi

nd credit arrangements. Owners' Equity represents investments by owners, residual net worth and retained earnings from ongoing businesperations.

The accounting equation uses "simple math" and involves only addition and subtraction. In fact, almost all the math you will do in this cous simple math. We will occasionally use multiplication and division, but all changes to accounts will be addition or subtraction.

Think for a moment about a new company. It's accounting system consists of a new, "fresh" set of books, no entries have ever been made, accounts have a zero balance.

Assets = Liabilities + Owners' Equity

$0 = $0 + $0

The books are in balance!!

f each, and every, transaction is a entered as a "balanced" entry, the books will stay in balance.

There are three general types of transactions and entries. ) Routine, daily operating events - represents over 99% of all transactions. ) Occasional events involving major assets, liabilities and owners' equity transactions. ) Adjusting and Closing entries - made to prepare statements and close the books at the end of the year. 

Here are some examples of common type 2 transactions. Before and after each one, the books must be in balance. In Chapter 3 we will seow these are actually entered into the books, in the form of journal entries.

Owner deposits $100 in the company checking account.

Assets = Liabilities + Owners' Equity

$100 = $0 + $100

Cash is an Asset, on the Left side. Owners' Equity is on the Right side.The amounts are equal

A $1000 computer is purchased on credit.

Assets = Liabilities + Owners' Equity

$1000 = $1000 + $0

Computer is an Asset, on the Left side.A Charge account is a Liability and is on the Right side. 

The owner transfers a parcel of land to the company, and signs a contract for a building to be constructed. The land is worth $10,000 and  building will cost $90,000. The building will be paid for with a bank loan.

Assets = Liabilities + Owners' Equity

$100,000 = $90,000 + $10,000

Land and Building are Assets, on the Left side. Bank loan is a Liability and is on the Right side. This is a compound entry, and involves mo

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han two accounts. 

Balance Sheet accounts can increase or decrease, so you will be adding to or subtracting from their balance after each transaction.

The accounting equation can be expressed in 3 ways: 

1. Assets = Liabilities + Owners' Equity 2. Liabilities = Assets - Owners' Equity 3. Owners' Equity = Assets - Liabilities 

t is common to abbreviate the accounting equation as A=L+OE. Using the numbers from the balance sheet above we get the followingquations: 

1. 33,000 = 14,000 + 19,000 [A=L+OE] 2. 14,000 = 33,000 - 19,000 [L=A-OE] 3. 19,00 = 33,000 - 14,000 [OE=A-L] 

f you know any two of the amounts you can calculate the third.

Quick Quiz Try solving these equations for practice. 

Assets = Liabilities + Owners' Equity

1 ? = 27,000 + 36,000

2 426,600 = ? + 168,400

3 1,537,618 = 692,327 + ?

Click for answers 

Try making up several examples on your own for practice.

We can see the Accounting Equation reflected in the layout of the Balance Sheet, as shown below. Notice that Total Assets equals the sumTotal Liabilities and Total Owners' Equity, shown in bold below. 

ABC Company Balance Sheet 

December 31, 2002

Assets

Cash $ 10,000

Accounts Receivable 6,000

Inventory 17,000

Total Assets $ 33,000 <-

  |

Liabilities & Owners' Equity |

Accounts Payable $ 6,000 E

 Notes Payable 8,000 Q

Total Liabilities 14,000 U

  A

Common Stock, $1 par 10,000 L

Retained Earnings 9,000 |

Total Owners' Equity 19,000 |

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Total Liabilities & Owners' Equity $ 33,000 <-

Accounts and the Chart of Accounts An Account is a record used to summarize increases and decreases in a particular asset or liability, revenue or expense, or in owner's equitAccounts usually have very simple and generic titles such as Cash, Accounts Payable, Sales, and Inventory. These are simple and descriptierms under which many different transactions can be recorded.

Accounts are organized in a Chart of Accounts . This is a simple list of account titles presented in the following order: Assets, Liabilities,Owners' Equity, Revenue, Expenses. Organizing accounts in the correct order makes it much easier to prepare financial statements and enteransactions. 

When doing homework problems students should read carefully and look for a Chart of Accounts, or for references to specific accounts, thhould be used in that problem. If you don't find these, you should review the examples in the textbook chapter material for the correctccounts to use. 

Here is a sample Chart of Accounts, showing accounts in the correct order. Account group dividers are usually omitted in actual practi

They are shown here for illustrative purposes, so the student can see how the Chart of Accounts is organized, and how it relates to the finantatements. 

ABC Company, Inc. Chart of Accounts

Balance Sheet Accounts ---- Asset Accounts ---- Cash 

Accounts Receivable Prepaid Expenses Supplies Inventory Land Buildings Vehicles & Equipment Accumulated Depreciation Other Assets ---- Liability Accounts ---- Accounts Payable Notes Payable - Current Notes Payable - Long Term ---- Stockholders' Equity Accounts ---- Common Stock Retained Earnings

Income Statement Accounts ---- Revenue Accounts ---- Sales Revenue 

Sales Returns & Allowances Sales Discounts Interest Income ---- Expense Accounts ---- Advertising Expense Bank Fees Depreciation Expense Payroll Expense Payroll Tax Expense Rent Expense Income Tax Expense Telephone Expense Utilities Expense

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