Chapter 1 section 2 notes

Chapter 1 Section 2 (pages 6 (starts on page 9) -12)

Ø Concepts
o Concept of Business Entity
§ Is applied when a business’s financial information is recorded and separated from owner’s personal financial information.
§ The business can be owned by one person or a company.
§ You can not pay out personal expenses from the business even if it is privately owned by one person or not.

o Concept of Unit of Measurement
§ Measured in dollars or some type of value.
§ It can not be in different currencies

Ø Transaction #1 Page 9
o Receive cash from owner as an investment
o You must add the amount received to the liabilities and the owner’s equity so that both sides equal out to the same amount
o Remember the rule of thumb in math. If you do one thing to one side then you must do it to the other.

Ø Transaction #2 Page 10
o You have a plus and a negative and when you have both they add out to zero
o Your capital is never changed and you pull everything down


Ø Transaction #3 Page 10
o You take money out of cash and put it into the prepaid (asset) amount and again it is a plus and minus so it equals out to a zero.
o Your capital again does not change because you don’t touch it or need anything out of it.


Ø Transaction #4 Page 11
o When taking money out from a liability account (Buying with no money (loaning)) it goes over to your assets as the same amount (even though you borrowed the money it is not a minus on your liabilities).
o After all your transactions you will minus the amount of money that you owe to the liabilities.

Ø Transaction #5 Page 11
o Paying back liability out of cash (asset)
o Subtract from your asset (cash) and then transferred to pay off your liability.
o In doing all of that it keeps both sides equal.

Ø Accounts Payable: is a liability account which means that it has to be paid

Ø Anything prepaid is a asset

Ø Capital Account: is a owners equity

Ø A/P: the abbreviation for accounts payable

Ø Both sides of the accounting equation must always equal