Financial Accounting 2

INTRODUCTION TO ACCOUNTING
CHAPTER 2
FINANCIAL STATEMENTS
Learning Objectives
 The types of financial statements

 Understand the pupose of reporting
 Understand the balance sheet
 Identify the income statements
 Idetify assets, liablities and equities
 Understand the relation of accounting and economic activities
 Determine the generally accepted accounting principles
 Identify the basic financial statements
 Understanding definition of of accounting
 Determine the elements of reporting
 Identify the type of business and its effect on the accounting informations
Chapter 2: Financial Statements
Summaries of financial activities of business are called reports (financial statements) which
are prepared on a regular basis at the end of each accounting period. The accounting period
typically is one year; however, it can be any length of time for which records are maintained.
Usually the minimum is one month and the maximum length of time is one year for financial
statements. Etleast in one year financial statements must be prepared by acounting system.
There are several financial statements. You are going to prepare Balance Sheet, Income
Statement, Statement of Cash Flows.
The main statements are Income Statement, Balance Sheet and Statement of Cash Flows.
These statements must be completed in that order.
Notice the following pages in this book that shows the three primary statements and how the
information goes from one source to another. It is very important to always check your
numbers since an incorrect number will affect more than one statement.
The central means of external financial reporting is a set of financial statements.
There are three primar financial statements:
 Income statement: Depicts the revenue and expenses for a designated period of time.
 Balance sheet: Describes where the enterprise stands at a specific date.
 Statement of Cash Flows : Depicts the ways cash has changed during a designated
period of time.
A balance sheet presents assets, liabilities and owner's equity at a specific date. A balance
sheet is also called Statement of Financial Position. This statement is a listing of the firm’s
assets, liabilities, and owner’s equity at a specific point in time. Total Assets must equal the
addition of Liabilities and Owner’s Equity.
An income statement presents revenues and expenses and resulting net income or loss for a
period of time. An income statement is also called Statement of Operations, Earnings
Statement, or Profit and Loss Statement (P/L). This is a summary of a business’s revenue and
expenses for a specific period of time. It only shows differences revenue and expenses for a
period of time like one monthly, quartly and yearly). Net Income is realized when revenue
exceeds expenses and net loss is realized when expenses exceed revenue.
A cash flow statement summarizes information about cash outflows (payments) and inflows
(receipts). This statement may also include certain information not related to actual cash
flows.
All financial statements consist of different elements. There are ten elements: assets,
liabilities, equity, revenue (increase equity), expenses (decrease equity, distributions
(dividends which deacrease equity), retained earnings (revenue less expenses = net income or
loss) (which most of the items will be explained in this or further chapters).
Assets
Assets are economic resources that are owned by the business to accomplish its main goal,
i.e., increase owners' wealth and are expected to provide positive future cash flows. Assets are
items with money value that are owned by a business. Some examples are: cash, accounts
receivable (selling goods or services on credit), notes receivable, inventories and
tools&equipment ( for usage of office, store, delivery, etc.), and supplies (for usage of office,
store, delivery, etc.)
Assets are economic recourses of a business used
To be formally recognized as an asset, the following two conditions must be met:
 potential economic benefit must be assignable to a particular entity, and
 event giving rise to the assignment must have already occurred.
For example, if a company has purchased a piece of equipment and uses it in generating
revenues, it is considered as an asset. However, if the company just considers buying new
equipment, it can't be recorded or shown as an asset.
Current Assets
Cash
Temporary Investments
Notes Receivable
Accounts Receivable
Inventory
Supplies
Property Plant and Equipment

Land
Buildings
Equipment
Vehicles,
Intangibles
Patent
Copyright
Trade marks
Liabilities:
Liabilities are debts that represent negative future cash flows for the business enterprise.
Liabilities are debts owed by the business. Paying cash is often not possible or convenient, so
businesses purchase goods and services on credit. The name of the account used is Accounts
Payable in general. Another type of liability is Notes Payable. This is a formal written
promise to pay a specific amount of money at a definite future date.
Current Liablities:
Accounts Payable
Notes Payable
Salaries payable
Tax payable
LongTerm Liabilities:
Notes payable
Bonds payable
Loan payable
Owners' Equity:
Owners’ equity represents the owners’ claims to the assets of the business. The difference
between Assets and Liabilities is Owner’s Equity. The can also be called capital,
proprietorship, or net worth.
Expenses are to use of asset, will decrease owners’ equity
Revenue is increase of equity
Businesses communicate accounting information to the public through a process

known as financial reporting.
Financial reporting is a process through which companies communicate information

to the public.
Statement of Cash Flows
Income Statement
Balance Sheet
 Balance Sheet :Describes where the enterprise stands at a specific date.

 Income Statement: Depicts the revenue and expenses for a designated period
of time.
 Statement of Cash Flows : Depicts the ways cash has changed during a
designated period of time.
A balance sheet presents assets, liabilities and owner's equity at a specific date. A balance
sheet is also called Statement of Financial Position.
An income statement presents revenues and expenses and resulting net income or loss for a
period of time. An income statement is also called Statement of Operations, Earnings
Statement, or Profit and Loss Statement (P/L).
A cash flow statement summarizes information about cash outflows (payments) and inflows
(receipts). This statement may also include certain information not related to actual cash
flows.
ABC Travel Agency
Balance Sheet
December 31, 2009
Assets Liabilities & Owners' Equity
Cash $ 10.250 Liabilities:
Notes receivable 20.000 Notes payable $ 24.000
Accounts receivable 22.750 Accounts payable 26.000
Inventories 15.000 Tax payable 40.000
Supplies 7.000 Total liabilities $ 90.000
Land 150.000
Building 100.000 Owners' Equity:
Office equipment 25.000 Capital stock 200.000
Retained earnings 60.000
Total $350.000 Total $350.000
The fundamental equation in accounting (called the balance sheet equation) is:
ASSETS = LIABILITIES + OWNER’S EQUITY.. (or, as we will frequently refer to it: A=L+OE).
Definitions:
ASSET: An asset is an economic resource owned by a business that is used to earn
revenue. Assets are what a company owns, such as equipment, buildings and
inventory.
LIABILITIES + OWNER’S EQUITY :Claims on assets include liabilities and owners'
equity. Liabilities are what a company owes, such as notes payable, trade
accounts payable and bonds. LIABILITY is a debt or obligation that you owe to someone
else. Owners' equity represent the claims of owners against the business assets.
Accounting equation
Accounting equation means the assets that company owns equals the claims or
sourses ( liabilitiy and owner’s equity) of the business. Asset has it own source.
Means we can create asset with claims. All economic transactions in business create
an accounting equation. The assets are created In the busines t has it own source. It
means assets ares created asset with claims. How can a company has an asset, if
owners invest cash and related thigs, after investment entity has cash but there is
also claim of this cash called capital. Claim of cash is capital. We need to provide a
definition of claims before we proceed with the basic accounting equation.
A company's assets belong to the resource providers who are said to have claims on
the assets.In other words, each asset has its own source provided by an owner or
creditor. So, there can't be any claim without an appropriate asset and vice versa.
Based on the previous statement, we can define the basic accounting equation:
The equation means that:
 The value of the property the company owns equals the funding sources the
company used to acquire the property.
 The value of the property the company owns equals the claims of creditors to
the property plus the claims of the company’s owners to the property
(remember that the claims of the creditors are satisfied first, so the owners are
entitled to claim only the remaining property.)
 Stockholder’s Equity is also called Net Worth because it represents what the
company is worth to its owners after all liabilities have been paid.
Owners’ Equity is NOT a single account in the general ledger. It is a collection of

accounts, some of which add to the value of the company and others which reduce
the value of the company to its owners:
 Capital stock increases Owners’ Equity because it is an investment of capital

in the company.
 Dividends decrease Owners’ Equity because they are a return of assets to
the owners, reducing what the company is worth to the owners.
Dividend is known as withdrawal (Drawing) which is the removal of business
assets for personal use by the owner.
 Revenue (or sales or fees earned) increases Owners’ Equity because the
company receives assets for providing its goods or services, increasing what
the company is worth to the owners.
 Expenses, the costs incurred to produce revenue, reduce Owners’ Equity

because the company uses up or consumes assets, reducing what the
company is worth to the owners.
 Net Income is Revenue minus Expenses, also known as profit. Net Income
may be negative if Expenses exceed Revenues, when it is known as Net Loss.
Net Income increases Owners’ Equity whereas Net Loss reduces Owners’
Equity.
 Retained earnings, in the simplest terms, is the accumulation of all Net Income
and Net Losses less all the dividends paid to the owners since the company’s
formation.
Based on the previous statement, we can define the basic accounting equation:
Accounting Equation
Assets = Liabilities + Equity

Things of Value Debt Owner’s Claims
Resources owned by a Company Creditors Claims on Assets Owners’ claims on
Yield future benefits Payables assets
Owed to others Assets - Liabilities
Example:
Cash Accounts Payable Contributed Capital
Accounts Receivable Wages Payable Common Stock
Supplies
Prepaids Notes Payable Retained Earnings
Property and Equipment Taxes Payable Net Income
- Dividends
Assets = Liabilities + Owner’s Equity

The fundamental equation in accounting (called the balance sheet equation) is:
Assets = Liabilities + Owners’ Equity (or, as we will frequently refer to it: A=L+OE)
This equation must always balance!
Assets = Claims
Claims are divided into two categories:
 Creditors' claims that are called liabilities

 Owners' claims that are called equity
Resources Surces (Claims)

=
Assets Liabilities + Equity
Liabilities are debts and obligations of a company.

Equity is what the company "owes" to owners.
The amount of total assets minus total liabilities equals equity. Because equity equals
the difference between assets and liabilities, it is also called net assets.
If a company goes bankrupt, liabilities are paid off first to creditors, while equity is the
last to be distributed. Therefore, owners' equity is also called residual equity.
Business Transactions And The Accounting Equation
A transaction is any activity that changes the value of a firm’s assets, liabilities, or
owner’s equity. Each transaction has a dual effect on the accounting elements. A
transaction may affect more than two accounts in a transaction. Each transaction
increases or decreases (or both) the basic elements in the accounting equation. The
effect of recording a business transaction must always leave the two sides of the
accounting equation in balance.
To understand how a transaction affects the accounting equation, go through each of

the examples in the following example. For understanding of activities and effects on
accounts We will look at an example of the basic accounting equation of Cem Can
Computer Care Service.
Cem Can and his family invested $5,000 in CC’s Computer Care Service .
After set up of business the amounts which is invested will be shown in

the accounting equation as follows:
Illustration 1-2: Example of accounting equation
Claims
Assets =
Liabilities + Equity
$5.000 = $0 + $5.000
CC’s Computer Care Service purchased a computer for $2,000 paid in cash
$600. The balance will pay in 10 days.
Illustration 1-2: Example of accounting equation
Claims
Assets =
Liabilities + Equity
$5.600 = $1.400 + $5.000
Company’s assets will incraese 5.600, claims on these asset are liablitiy and equity
also equls 5.600
Cem’s Marketing Advisory Service

(1)Cem and his friend contribute $10,000 capital in cash to open busines
Assets = Liabilities + Owners’ Equity
Cash +$10,000 Capital +-$10,000
Transactions and the Accounting Equation
Cash + A/R + Equip. =L/P + C. Cap.+ R/E
+10,000 +10,000
(2) The company borrows $5,000 from a bank
Cash +$ 3,000 Loan Payable + $5.000

+10,000 +10,000
+5.000 +5.000
(3) Company purchases equipment for $6,000 cash

Cash -$ 6,000 Equipment +$6.000
+10,000 +10,000
+5.000 +5.000
-6.000 +6.000
(4) Company performs service for $20,000. The customer pays $7,000 in
cash and promises to pay the balance at a later date.
Cash +$ 7,000 Account Recivable $13.000 Retained Earnings $20.000
+10,000 +10,000
+5.000 +5.000
-6.000 +6.000
+7.000 +13.000 +20.000
(5) Company pays $8,000 for expenses (wages, interest, and maintenance)
Cash -$8,000 Retained Earnings-$8,000
+10,000 +10,000
+5.000 +5.000
-6.000 +6.000
+7.000 +13.000 +20.000
-8.000 -8.000
(6) Company pays dividend of $3,000
Cash -$3,000 Retained Earnings-$3,000
+10,000 +10,000
+5.000 +5.000
-6.000 +6.000
+7.000 +13.000 +20.000
-8.000 -8.000
-3.000 -3.000
At the end of the year the result of ther transactions:
+10,000 +10,000
+5.000 +5.000
-6.000 +6.000
+7.000 +13.000 +20.000
-8.000 -8.000
-3.000 -3.000
5..000 +13.000 +6.000 = 5.000 +10.000 + 9.000
Total asssts = Total Libaility + Owner’s Equity
24.000 = 5.000+ 19.000
CC's Marketing Advisory Service

Balance Sheet
December 31, 2009
Account Reciable 13.000
Tools&Equipment 6.000 Loans Payable 5.000
Owners' Equity:
Capital Stock
(Contributed Capital) 10.000
Retained Earnings 9.000
Total $24.000 Total $24.000

Income Statement
January 01, 2009 - December 31, 2009
(fort he year ended December 2009)
Sales Revenue 20.000
Operating Expenses: 8.000
Net Income 12.000

Statement of Retained Earnings
Begining Retained Earnings Balance 0

Plus:Net Income 12.000
Lless:Dividend to Stockholders 3.000
Ending Retained Earnings Balance 9.000

Operating activities:
Collected from Sales Revenues(+) 7.000
Payments for expenses (8.000)
Net Cash From Operating Activities (1.000)
Investing Activities:
Purchase of equipment (6.000)
Net Cash From Investing Activities (6.000)
Financing Activities:
Borrowings from bank 5.000
Capital Contribution from Owners 10.000
Dividends (3.000)
Net Cash From Financing Activities 12.000
Cash Balance at the begining of the period 5.000

Plus: Begining Cash Balance 0
Cash Balance at the end of the period 5.000
Example
Jeam Turk is beginning a consulting business called JT Consulting. The business is

started with investing of 20.000TL capital on January 1 of 2017.(transaction1)
Cash Accounts Equipment = Accounst C. Capital R/E

Receivable Payable
1) 20,000TL 20,000TL
Totals 20,000TL 20,000TL
JT invested 20,000TL of capital in a business
I have placed the accounts across the top in this transaction table, with Assets on the left
(Cash, Accounts Receivable, and Equipment). There's one liability account (Accounts
Payable), and one Owner's Equity account, Jeam Turk, Contributed Capital.
Explanation of transaction 1: Owner's Investment in the Business

In this first transaction (refer to table above), Leam creates a new business entity by investing
20,000TL of his personal funds. Notice that, from the viewpoint of this new business, cash is
received in the amount of 20,000TL. The source of this cash is the owner, Jeam Turk. The
implication is that money can come into a business from the owner.
In the diagram above, you'll note that I've shown the totals for the accounts. After this one
transaction, you can prove to yourself that Assets (Cash of 20,000TL) are equal to Liabilities
(0TL) + Owner's Equity (Capital of 20,000TL).
Transaction 2: Jeam Turk purchases some equipment for office of 4,000TL cash.
Cash Accounts Equipment = Accounst C. Capital R/E

Receivable Payable
1) 20,000TL 20,000TL
2) (4,000TL) 4,000TL
Totals 16,000TL 4,000TL 20,000TL
JT purchases 4,000TL of equipment for cash

Notice that, in transaction 2, one asset (Equipment) increases, while another asset (Cash)
decreases. As a result end of the transaction the assets of business will equal to Liabilities
plus Owner's Equity.
Transaction 3: Jeam Turk purchases 600TL of office supplies on account.
Cash Accounts Supplies Equipment = Accounst C. Capital R/E

Receivable Payable
1) 20,000TL 20,000TL
2) (4,000TL) 4,000TL
3) 600TL 600TL
Totals 16,000TL 600TL 4,000TL = 600TL 20,000TL
JT purchases 600TL of supplie on account.

Notice that in transaction 3, JT purchases supplies on account. We have added a column for
supplies which is new asset of business. No payment was made by the JT. The amount of
supplies is paid at a later time. This transaction represents an increase in an asset, Supplies,
and an increase in a liability (JT owes to supplier of supplies), Accounts Payable.
Total Assets = 20,600TL

Total Liabilities + Total Owner's Equity= 20,600TL
Transaction 4: The business paid 200TL to supplier of supplies for (payment of cash on
account)
Assets = Liability Equity

Receivable Payable
1) 20,000TL 20,000TL
2) (4,000TL) 4,000TL
3) 600TL 600TL
4) (200TL) (200TL)
Totals 15,800TL 600TL 4,000TL = 400TL 20,000TL
JT paid 200TL on account payable.

Note tahat in transaction 4, the payment of an Account Payable ("payment on account")
reduces both the liability (Accounts Payable account ) and Cash.
Transaction 5: The company provided 2,000TL consulting services to customers and

received only 300TL. (The revenue is Earned cash and on Account)

Receivable Payable
1) 20,000TL 20,000TL
2) (4,000TL) 4,000TL
3) 600TL 600TL
4) (200TL) (200TL)
5) 300TL 1,700TL 2,000TL
Totals 16,100TL 1,700TL 600TL 4,000TL = 400TL 20,000TL 2,000TL
JT provided services to customer.

Notice that the earning of a Revenue increases Owner's Equity, and also increases Accounts
Receivable, or asset (cash). The earning of a revenue always increases owner's equity, and is
usually evidenced by an increase in an asset, such as Cash or Accounts Receivable.
The purpose of running a business is to provide revenue, and the invester expects to make a
profit. In our example, we will call the revenue account Service Revenue adn revenue
increases owners’ equity. Retained earnings is an equity account.
Transaction 6: The company paid 750TL salaries to employee.

Receivable Payable
1) 20,000TL 20,000TL
2) (4,000TL) 4,000TL
3) 600TL 600TL
4) (200TL) (200TL)
5) 300TL 1,700TL 2,000TL
6) (750TL) (750TL)
JT paid 750TL salaries to employee.

Notice that Salary payment to employee is an expense. Expens is an owner's equity account.
Expenses reduces owner's equity, and it is decreased in cash or assets.
Transaction 7: The company paid 150TL dividend to Jem Turk or Jem Turk withdraws
150TL in cash from business for his personal use.

Receivable Payable
1) 20,000TL 20,000TL
2) (4,000TL) 4,000TL
3) 600TL 600TL
4) (200TL) (200TL)
5) 300TL 1,700TL 2,000TL
6) (750TL) (750TL)
7) (150TL) (150TL)
Jeam Turk withdraws 150TL in cash for personal use..
Notice that Withdraws or dividends deacrease owners’ equity, when the owner withdraws
cash from the business, this represents a decrease in owner's equity-but keep in mind that
Drawings are not considered an expense. The reason for this is that expenses are incurred for
the purpose of generating revenue. A drawing, on the other hand, is simply a disinvestment
by the owner, and will likely not increase revenue in the future.
Net Income = Revenues (increase Owner's Equity) – Expenses(decrease Owner's Equity) and,
net income of business appears as Retained Earnings.
A Revenue is an increase in Owner's Equity brought about by operating the business. An auto
mechanic operates by fixing cars; a lawyer earns revenue by consulting the clients.
An Expense is a usage of asests and It is used up to generate of revenue. A company might
hires employees which resulting in Salaries Expense, in order to accomplish the company's
goals.
We have processed seven transactions, and look how much work it required! Our task now is
to prepare three financial statements: an Income Statement, and a Balance Sheet. Normally,
these financial statements are prepared at the end of the accounting period. In this example,
we will consider the accounting period to be one month, so the financial statements would be
prepared on January 31,2017.
The Income Statement

the Income Statement represents revenu and expenses, and between revenues and expenses is
net Income. The Income Statement covers a period of time, and in this case, we'll assume that
the seven transactions shown above represent all of the transactions for January 2017. The
Income Statement would be constructed as follows:
Jeam Turk Consulting
Income Statement
For the Month Ended January 31,2017
Revenues:
Consulting Revenue 2,000TL
Operating Expenses(-) (750TL)
Net Income 1,250TL
The Balance Sheet
The Balance Sheet shows the total Assets, Liabilities, and the Owner's Capital. You
can look across the bottom line of the transaction table to find the accounts used for
the Balance Sheet.
JT Consulting
Balance Sheet
January 31, 2017
Cash 15.200 Liabilities:
Supply 600 Accounts Payable 400
Account Receivable 1,700
Equipment 4,000 Owners' Equity:
Capital Stock 20.000
Retained Earnings 1,100
Total 21.500TL Total 21.500TL
Notice that the Balance Sheet shows the financial position of the company as of one
date in time, January 31, 2017.
Notice that the net income for January was 1,250; and the owner withdrew 150TL.
After distribution to owners is subtracted remains 1,100TL of retained earnings.
Example:
Let us see how different transactions will affect the accounting equation and balance
sheet of the entity. We will take a look at several transactions.
On July 1, Cem Can and his family invested $10,000 in CC’s Computer Care
Service .
CC's Computer Care Service
Balance Sheet
July 1, 2009
Cash $ 10.000
Owners' Equity:
Capital Stock $ 10.000
Total $10.000 Total $10.000
On July 2, CC’s hired a computer technican, promised to pay monthly wages of

300TL.
No economic effect on Balance sheet
On July 3, CC’s purchased a computer for $2,500 cash.

Balance Sheet
July 3, 2009
Cash $ 7.500
Tools&Equipment 2.500 Owners' Equity:
Capital Stock $10.000
Total $10.000 Total $10.000
On July 6, CC’s purchased a $8,000 truck. CC’s paid $3,000 down in cash and issued a
note payable for the remaining $5,000.

Balance Sheet
July 6, 2009
Tools&Equipment 2.500 Notes Payable $5.000
Veichles 8.000
Owners' Equity:
Total $15.000 Total $15.000
On July 10, CC’s purchased some suplies for $200 on account from Clean Ltd.

Balance Sheet
July 10, 2009
Supply 200 Notes Payable $5.000
Tools&Equipment 2.500 Accounts Payable 200
Veichles 8.000
Owners' Equity:
Total $15.200 Total $15.200
Cem realized he had purchased more supplies than needed.

On July 14, CC’s was able to sell half of the supplies to neighbour company Fast
Computer Ltd. for $100, a price equal to CC’s cost. CC’s will receive the cash within 15
days.

Balance Sheet
July 14, 2009
Account Reciable 100 Notes Payable $5.000
Tools&Equipment 2.500
Veichles 8.000 Owners' Equity:
Total $15.200 Total $15.200
On July 15, CC’s pays for 80 of its accounts payable to Clean Ltd .

Balance Sheet
July 15, 2009
Total $15.120 Total $15.120
On July 19, Fast Computer pays CC’s $50 as a partial settlement of its accounts
receivable.
Balance Sheet
July 19, 2009
Total $15.120 Total $15.120
On July 30, CC’s recorded computer care services provided during July of
$1500. All clients paid in cash.

Balance Sheet
July 30, 2009
Total $16.620 Total $16.620
On July 30, CC’s purchased gasoline for the the truck for $200 cash.

Balance Sheet
July 30, 2009
Total $16.420 Total $16.420
On July 31, CC’s pad salary of technician for $300.

Balance Sheet
July 30, 2009
Total $16.120 Total $16.120
$16.120 = $5.120 + $11.000

Income Statement
For the Month Ended July 31, 2009
Sales Revenue 1.500

Operating Expense:
Wages Expense 300
Gasoline Expense 200
Net Income 1.000

For the Month Ended May 31, 2005
Cash flows from operating activities:
Cash received from revenue transactions $ 1.500
Cash paid for expenses (500)
Cash paid for suplies (80)
Cash collected selling suplies 50
Net cash provided by operating activities $ 970
Cash flows from investing activities:
Purchase of computer $ (2.500)
Purchase of truck (3.000)
Net cash used by investing activities (5.500)

Cash flows from financing activities:
Investment by owners 10.000
Increase in cash for month $ 5.470
Cash balance, May 1, 2005 -
Cash balance, May 31, 2005 $ 5.470
Financial Statement Articulation
Net Income (IS) 1.000

Retained Earnings (BS) 1.000
Cash (BS) 5.470

Cash Balance (SCF) 5.40
Chapter 2
THE ACCOUNTING EQUATION: EXERCİSES
Exercise 1: CemCan Company is founded by two partner Can and Cem. Partners invested
$10.000 and issued 1.000units of shares.
The effect of the contributions by the owners on the accounting equation is as follows:
Effect of cash contribution by the owners to business as capital:

Claims
+$10.000 = + +$10.000
2) CemCan Company purchaesd a car for daily operatin in the busines ammounted $6.000 by
borrowing cash from a bank. This is also an asset source transaction. In the table below the
beginning balances are derived from the ending balances of the previous transaction:
Effect of purchasing asset with borrowing
Claims
Beginning balance $10.000 = + $10.000
Effect of purchasing +$6.000 = +$6.000
Ending balance $16.000 = $6.000 + $10.000
3) CemCan gives a service to a customer and received $1.500
(note that revenues are recorded as retained earnings):
Effect of revenue recognition
Equity
Retained
Assets = Liabilities + Capital +
Earnings
Beginning balance $16.000 = $6.000 + $10.000 + $0
Effect of revenue +2.000 = + + +2.000
Ending balance $18.000 = $6.000 + $10,000 + $2.000
4) CemCan paid to empolyee $500 as salary.
This is an example asset use transaction. Assets used in the process of generating revenues
are called expenses. Expenses decrease retained earnings.
Effect of asset use or expense recognition

Equity
Retained
Assets = Liabilities + Capital +
Earnings
Beginning
$18.000 = $6,000 + $10.000 + $2.000
balance
Effect of
(500) = + + (500)
expenses
Ending balance $17.500 = $6.000 + $10.000 + $1.500
5) CemCan Company distributed $750 to owners of business.

Effect of distribution to owners.
Equity
Contributed Retained
Assets = Liabilities + +
Capital Earnings
Beginning balance $17.500 = $6.000 + $10.000 + $1.500
Effect of distribution (500) = + + (750)
Ending balance $17.000 = $6.000 + $10.000 + $750
Problem 1
Carpet Cleaning Service
This example analyzes the transactions for Carpet Cleaning Service for May 2015. The
example lists the types of accounts affected by each transaction to show that the accounting
equation remains in balance after every transaction.
1. Can and His Partner Umut invested $4.000 of their own cash to start The Carpet Cleaning
Service (CCS Ltd.).
2. Can and Umut borrowed $2,500 from Their Family for the business and signed a notes
payable.
3. CCS paid $1.400 for a used vacuum cleaner and shampoo machine.
4. CCS purchased a used truck for $2,500 from The New İkinciel Inc. and paid only 1.500, for
the reminder signed a note payable..
5. CC Service Ltd Purchased of $850 cleaning supplies and paid to $300, the remainder is to be
paid next week.
6. During the first half of May, CCS performed $3.250 of cleaning services.
Customers paid $2.750 in cash and promised the remaining payment by May 31.
7. The company paid the utility bill of $125.
8. $300 was collected from customers for services performed previously.
9. CCS paid back $500 from borrowing to their family.
10. The business consumed $380 of the cleaning supplies for given services in May.
11. Paid to Telephone bill of $50.
12. Partners withdrew $1.000 from the business.
Transac Cash Accounts Supplies Tools and Trucks Accounts Notes Capital Retained
tion Receivable Equipment Payable Payable earnings
Number
1 4.000 4.000
2 2.500 2.500
3 (1.400) 1.400
4 (1.500) 2.500 1.000
5 (300) 850 550
6 2.750 500 3.250
7 (125) (125)
8 300 (300)
9 (500) (500)
10 (380) (380)
11 (50) (50)
12 (1.000) (1.000)
Problem 2
Fast Info
Uğurcan Ertekin launched a business for advisory of Law called Fast Info Co.
The lists some typical transactions for Fast Info for June 2016. You have to specify the types of
accounts affected by each transaction and show that the accounting equation remains in balance after
every transaction.
1. The owner started Fast Info by investing $10.000.

2. $5.,000 was borrowed from a bank by signing a three year note.
3. Office Equipment was purchased of $2.600. Paid $1.400 and promised to pay for the
remainder in the couple of days.
4. Office supplies of $760 was purchased on credit.
5. $250 was paid for utilities
6. Performed of 5.750 consulting services, and collected of $4.500 from customers .
7. Hired a secretory and agreed to pay of $750 monthly.
8. $1.150 was paid for rent for June.
9. Paid $425 for the supplies purchased previously.
10. Employee was paid wage of $750 for June
11. Supplies costing $700 were used in June.
12. Paid of $50 electricity.
Trans. Cash Accounts Supplies Equipme Accounts Notes Capital Retained

Numb. Receivable nt Payable Payable Earnings
1 10.000 10.000
2 5.,000 5.000
3 (1.400) 2.600 1.200
4 760 760
5 (250) (250)
6 4.500 1.250 5.750
7
8 (1.150) (1.150)
9 (425) (425)
10 (750) (750)
11 (700) (700)
12 (50) (50)
Assignment 1
Machka Design Service
This assignment lists some typical transactions for Machka Design Service for April 2016. You have
to specify the types of accounts affected by each transaction and show that the accounting equation
remains in balance after every transaction.
1. AliCan Machka invested $8.000 in the business.

2. $7.000 was borrowed from a bank by signing a two year note.
3. Equipment was purchased for $14.000. $10.000 was paid in cash and a note was signed
for the remaining amount.
4. Supplies were purchased for $350.
5. Design services were performed for $2.100. The customer paid cash.
6. 3-D design services were performed on credit for $3200.
7. Employee wages of $1,500 were paid for October.
8. $950 was collected from customers for services provided previously.
Transaction Cash Accounts Supplies Equipment Accounts Notes Capital Retained

Number Receivabl Payable Payable Earning
e
1 8.000 8.000
2 7.000 7.000
3 (10.000) 14.000 4.000
4 (350) 350
5 2.100 2.100
6 3,200 3.200
7 (1,500) (1,500)
8 950 (950)
Additional Exercise1
Garden Design Advisory
1. The owners invested $15,000 to start Garden Design Advisory (GDA) Inc.
2. $10,000 was borrowed from a Trust Bank by signing a five-year note.
3. Office furniture was purchased on credit for $3,600 from Officelux.
4. Office supplies were purchased for $340 on credit from BigStore.
5. New garden design services were performed for client for $7,200. Of this amount, $3,250 was
collected in cash.
6. Paid $210 to BigStore.
7. $1,300 was paid to Officelux.
8. $2,000 was collected from customers for services provided previously on credit.
9. Services were performed for municipality client for $8,800 on credit.
10. $550 was paid for utilities
10. $1,720 was paid for rent.
11. Paid a salary of $1,350 to the secretary for April.
12. Partial collection was made from municipality of $3,800
13. Paid to partners $2,250
Required: Prepare income statement and balance sheet for GDA

Solution:
Income Statement
For April 30, 2016 Amount
Service Revenue 16,000

Operating Expenses(-)
Utility Expense 550
Supply Expense 340
Salary Expense 1,350
Rent Expense 1,720 3,960
Net Income 12,040
Garden Design Advisory

Balance Sheet
April30,2016
Assets Liabilities & Stockholders Equity
Current Assets: Current Liabilities:
Cash 26,670 Accounts Payable 2,430
Accounts Receivable 6,950 Total Current Liab. 2,430
Long Term Liabilities:
Plant Assets: Notes Payable 10,000
Tools& Equipment 3,600 Total Liabilities 12,430
Owner’s Equity
Capital 15,000
Retained Earnings 9,790
Total Equity 24,790
Tot.Liabilities & Owners’
Total Assets $37,220 Equity 37,220
Exercise2:
Effect on
Event
Type of Event Total Explanations
No
Assets
a Asset Source Increase Increase in assets and equity
... ... ... ...
The list of events is presented below:
a) Owners invested cash as capital;
b) Paid for Office furniture with cash.
c) Purchased computer in cash;
d) Borrowed cash from a İşbank;
e) Planned a purchase of new building;
f) Agreed to pay eployee salries end of the each moth.
g) Received cash for the consalting service provided to customers;
h) Paid employees salaries in cash;
i) Repaid a bank loan with cash;
l) Distributed cash to the owners;
Required:
Identify each of the above unrelated events as asset source, asset use, or asset exchange
transaction. Some events may not be recordable under accounting rules. In this case, classify
the event as Not Applicable (n/a). Also for each event, indicate whether total assets will
increase, decrease, or remain unchanged. Use the table format below for your answer:
Look at the table below for the answers:
Event Type of Effect on Total

Explanations
No Event Assets
Increase in assets (Cash) and
A Asset Source Increase
capital (equity)
Asset Increase in asstes(building) and
B Unchanged
Exchange Decreaese in Assets (Cash)
Asset Increase in one asset (Computer)
C Unchanged
Exchange and decrease in another(Cash)
D Asset Source Increase
Liability(Loan)
Making plans does not affect
E n/a n/a
any asset or source
agreeing to pay does not affect
F n/a n/a
any asset or source
G Asset Source Increase
equity (Retained Earnings
Decrease in assets (Cash) and
H Asset Use Decrease
equity (Retained Earnings)
İ Asset Use Decrease
liabilities (Accounts Payable)
J Asset Use Decrease
equity (Retained Earnings)
Technical Avisory Business
1) Issues 100,000 shares of $1 par value common stock at par value for cash.
2) Acquires land and building costing $150,000 with the payment of $75,000 cash and the
assumption of a 20-year, 10-percent mortgage loan for the balance.
3) Purchases a used machine for $10,000 cash
4) Acquires supplies costing $2,500 on account
5) Returns defective office supplies purchased in (activity 4) and costing $500 to the supplier.
The account has not yet been paid.
6) Pays the supplier in (activity 4) and (activity 5) the amount due, less a 5-percent discount
for prompt payment. The firm treats cash discount as a reduction in the acquisition cost of
office supplies.
7) Issues a check for $1,400 for rent for office space.
8) Purchases a patent on a machine process for $20,000 cash.
9) Purchases office equipment for $4,200, making a down payment of $750 and agreeing to
pay the balance in 30 days.
10) Pays $525 to Fast Trucking Company for delivering the equipment purchased in (activity
3).
Sol:
Cash, Office supplies (OS), Plant Assets (PA), Long Term Liabilities (LTL)
Cash + OS + PA = CL + LT L + Equity
Exercise3) Using following table show the activties of Cunda’s Advisory service and their
effects on assets/liabilities and equities:
1) Ozan Cemcan contributes $20,000 in cash
2) The companyborrows $5,000 from İş bank
3) Company purchases equipment for $2,000 cash
4) Cunda’s Bakery performs service for $15,000. The customer pays $12,000 in cash and
promises to pay the balance at a later date.
5) Company pays $7,000 for expenses (wages, rent, and maintenance)
Cash A/R Equip. =L/P C. Cap. R/E
Exercise4) Machka Electric Car Services had the following transactions during periods
2015 and 2016. Transactions for 2015:
 Owners of the business invested $16.000 to begin operations;
 Provided a car services to new customer and received $4.000 cash payment;
 Purchased a computer $2.500 in cash.
 Borrowed $10.000 from İşbank.
 Paid $1.500 for Salaries of employee.
 Purchased a building for new operations for $15.000.
 Paid $1.000 to owners as dividend.
Transactions for 2016:
 Owners of the business invested additional $6.000.
 Paid $500 cash for advertising.
 Performed car services and was paid $7.000 in cash;
 Paid $3.000 cash to İşbank for loan
 Paid $1.500 for Salaries of employee
 Made $1.500 cash distribution to the owners.
Required:
Prepare the accounting equation and record effects of each event under the appropriate
headings. Use the accounting equation format provided below:
Balance Sheet Income Statement

Stat. of Cash
No Computer Ret. Net
Cash + Build. = Loan + Capital + Rev. - Exp. = Flows
+ Earn. Inc.

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INTRODUCTION TO ACCOUNTING

 The types of financial statements

Property Plant and Equipment

Expenses are to use of asset, will decrease owners’ equity

Revenue is increase of equity

Businesses communicate accounting information to the public through a process

Financial reporting is a process through which companies communicate information

 Balance Sheet :Describes where the enterprise stands at a specific date.

The equation means that:

Owners’ Equity is NOT a single account in the general ledger. It is a collection of

 Capital stock increases Owners’ Equity because it is an investment of capital

 Expenses, the costs incurred to produce revenue, reduce Owners’ Equity

Assets = Liabilities + Equity

Assets = Liabilities + Owner’s Equity

This equation must always balance!

Claims are divided into two categories:

 Creditors' claims that are called liabilities

Resources Surces (Claims)

Liabilities are debts and obligations of a company.

Business Transactions And The Accounting Equation

To understand how a transaction affects the accounting equation, go through each of

After set up of business the amounts which is invested will be shown in

Illustration 1-2: Example of accounting equation

Illustration 1-2: Example of accounting equation

Cem’s Marketing Advisory Service

Assets = Liabilities + Owners’ Equity

Cash +$10,000 Capital +-$10,000

Transactions and the Accounting Equation

Cash + A/R + Equip. =L/P + C. Cap.+ R/E

(2) The company borrows $5,000 from a bank

Assets = Liabilities + Owners’ Equity

Cash +$ 3,000 Loan Payable + $5.000

(3) Company purchases equipment for $6,000 cash

Cash -$ 6,000 Equipment +$6.000

Cash + A/R + Equip. =L/P + C. Cap.+ R/E

Assets = Liabilities + Owners’ Equity

Cash +$ 7,000 Account Recivable $13.000 Retained Earnings $20.000

Transactions and the Accounting Equation

Cash + A/R + Equip. =L/P + C. Cap.+ R/E

+7.000 +13.000 +20.000

Assets = Liabilities + Owners’ Equity

Cash -$8,000 Retained Earnings-$8,000

Transactions and the Accounting Equation

Cash + A/R + Equip. =L/P + C. Cap.+ R/E

+7.000 +13.000 +20.000

(6) Company pays dividend of $3,000

Assets = Liabilities + Owners’ Equity

Cash -$3,000 Retained Earnings-$3,000

Cash + A/R + Equip. =L/P + C. Cap.+ R/E

+7.000 +13.000 +20.000

At the end of the year the result of ther transactions:

Cash + A/R + Equip. =L/P + C. Cap.+ R/E

+7.000 +13.000 +20.000

5..000 +13.000 +6.000 = 5.000 +10.000 + 9.000

Total asssts = Total Libaility + Owner’s Equity

24.000 = 5.000+ 19.000

CC's Marketing Advisory Service

Total $24.000 Total $24.000