Master Accounting 200: Exam 1 Study Guide with Animations

The fundamental accounting equation forms the basis of all accounting systems.Assets represent resources owned by the business, shown in green.Liabilities are debts owed by the business, shown in red.Owner's Equity represents the owner's claim to business assets, shown in blue.We use T-accounts to track changes in each component. The left side is for debits, and the right side is for credits.Let's look at our first transaction: purchasing equipment for five thousand dollars cash.This transaction increases equipment with a debit, and decreases cash with a credit.Now let's look at purchasing inventory on credit for three thousand dollars.This increases inventory with a debit, and increases accounts payable with a credit.Remember, no matter what transaction we record, the accounting equation always remains in balance.Finally, let's see what happens when an owner invests ten thousand dollars in cash.This increases cash with a debit, and increases owner's equity with a credit.The three main financial statements are interconnected, each providing unique insights into a company's financial position.Net income from the income statement flows directly into retained earnings on the balance sheet.The cash flow statement reconciles all cash movements, which directly affect the balance sheet's cash account.Let's see how a single transaction affects multiple statements. Consider a credit sale of ten thousand dollars.This single transaction increases both accounts receivable on the balance sheet and revenue on the income statement.When the cash is later collected, it affects both the balance sheet and cash flow statement.The cash collection increases operating cash flow and updates the balance sheet's cash account.These interconnections ensure that all financial statements remain in balance and provide a complete picture of the company's financial position.Let's examine the two main types of adjusting entries: accruals and deferrals.Let's look at depreciation as an example of a deferral adjusting entry.When recording depreciation, we debit Depreciation Expense and credit Accumulated Depreciation.Now let's look at another common adjusting entry: recognizing unearned revenue.The closing process involves transferring temporary account balances to permanent accounts.First, we close revenue accounts to Income Summary.Next, we close expense accounts to Income Summary.Finally, we close Income Summary to Retained Earnings.Let's review the key points about adjusting entries and the closing process.Thanks for learning about adjusting entries and the closing process!