Understanding Accounting Equations and Accounts

• An account is a detailed record of the increases, decreases, and balance of an element in the accounting equation

Types of Accounts

• Asset accounts represent what a business owns, such as cash, accounts receivable, and equipment
• Liability accounts represent what a business owes to others, like accounts payable and salaries payable
• Owner's equity accounts represent the owner's stake in the business, including capital and withdrawals
• Revenue accounts track increases in owner's equity from sales of goods or services
• Expense accounts track decreases in owner's equity from the costs of doing business

The Accounting Equation

• Assets = Liabilities + Owner's Equity
• This equation must always balance to ensure the accounting records are accurate

Double-Entry Accounting

• Each transaction affects at least two accounts
• Debits increase asset, expense, and withdrawal accounts, while decreasing liability, owner's capital, and revenue accounts
• Credits increase liability, owner's capital, and revenue accounts, while decreasing asset, expense, and withdrawal accounts
• Debits must always equal credits for each transaction to keep the accounting equation in balance

Normal Balance

• The normal balance of an account is the side (debit or credit) that increases the account
• Asset, expense, and withdrawal accounts have a normal debit balance
• Liability, owner's capital, and revenue accounts have a normal credit balance

Chart of Accounts

• A list of all accounts used by a business, providing a framework for organizing financial data
• Accounts are typically numbered for easy reference

Journalizing

• The process of recording transactions in the journal, the book of original entry
• Each journal entry includes the date, accounts affected, explanation, and debit/credit amounts

Posting

Posting is transferring information from the journal to the ledger

• The ledger is a collection of all the accounts used by a business
• Posting involves transferring the debit and credit amounts from the journal to the corresponding accounts in the ledger

Trial Balance

• A listing of all accounts and their balances at a specific point in time
• Used to verify that total debits equal total credits
• Detects errors in journalizing and posting

Partnership

• A business owned by two or more people who agree to share in the profits or losses of the business
• Each partner contributes money, property, labor, or skill, and expects to share in the profits and losses of the business

Characteristics of a Partnership

• Voluntary association
• Agreement
• Limited life
• Mutual agency
• Unlimited liability
• Co-ownership of profits and losses

Voluntary Association

• Individuals must willingly agree to form a partnership

Agreement

• Partnerships are based on an agreement, either expressed or implied

Limited Life

• A partnership dissolves automatically when a partner leaves

Mutual Agency

• Each partner can act on behalf of the partnership when conducting normal business activities

Unlimited Liability

• Each partner is personally liable for all partnership debts

Co-Ownership of Profits and Losses

Partners share in the profits and losses of the partnership

Advantages of a Partnership

• Ease of formation
• Lack of corporate income tax
• Partners may bring more talent and capital to the business

Disadvantages of a Partnership

• Unlimited liability
• Mutual agency
• Limited life
• Partners may disagree

Partnership Agreement

• A written document outlining the terms and conditions of the partnership
• Should include: names and contributions of partners, rights and duties of partners, sharing of profits and losses, procedures for admitting new partners, procedures for withdrawals, and procedures for dissolving the partnership

Income Allocation

• Profits and losses can be divided based on a fixed ratio, capital contributions, or services performed
• Salary and interest allowances may be provided to partners before residual profits/losses are allocated

Dissolution of a Partnership

• Occurs when a partner leaves or a new partner is admitted
• Assets are revalued, and the partnership is wound up