Chapter 2
Linking Personal Accounting to Business Accounting
52
In Summary
List the differences between personal accounts and business accounts
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Some differences include: surplus (deficit) is called net income (loss); revenue is classified
as sales revenue or service revenue; the net worth section is replaced with the owner’s equity
section.
Describe the sequence of assets and liabilities as they appear on the balance sheet
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The assets of a business are listed in sequence, cash first and then all the other assets according
to their liquidity.
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The liabilities of a business are listed in sequence, starting with those that are payable within
the shortest amount of time and ending with long-term debts.
Define equity and calculate the balance of the capital account
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Owner’s equity represents the net worth of a business.
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The capital account tracks changes in owner’s equity including owner contributions. Owner
withdrawals are tracked separately in the owner’s drawings account.
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Ending Owner’s Equity = Beginning Owner’s Equity + Owner’s Contributions + Net Income
(Loss) - Owner’s Withdrawals
Describe the three main types of businesses
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A service business will provide services to clients. A merchandising business will buy inven-
tory and resell the inventory to customers. A manufacturing business makes its own products
and sells them to customers.
Record revenue based on the concept of accruals
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Revenue is recorded when services have been provided to customers, regardless of when cash
is received. Unearned revenue is used to record cash receipts before services are performed
and accounts receivable is used when a customer will pay after services are performed.
Record expenses based on the concept of accruals
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Expenses are recorded when they are incurred, regardless of when cash is paid. Prepaid
expenses are used to record cash payments before expenses are incurred and accounts payable
is used when suppliers will be paid after expenses are incurred.
Record business transactions inT-accounts
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When recording transactions in T-accounts, remember that every transaction must be
recorded in at least two accounts and the accounting equation must always remain in balance.
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Revenues and expenses must be recorded when they are incurred, not necessarily when cash
is transferred.This creates a need for additional accounts such as accounts receivable, prepaid
expenses, accounts payable, and unearned revenue.
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