# The ABC s of 123 s. (The Simple Secrets to Accounting Wisdom.)

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5 Now let s assume the owner decides to rent some space for the business. The owner would probably write a check to the landlord to pay the rent. Let s assume the rent is \$1,000. After writing the check, the books would look as follows: Cash \$9.000 Total \$9,000 Total \$00.00 Total \$9,000 You will notice here, that as the owner spent the \$1,000 to pay the rent, the owner s equity, or initial capital, in the business was reduced or decreased by the expenditure. Simply put, as the owner makes decisions to spend money to operate the business, those decisions will have an impact on the business, and the impact will be a reduction in the owner s capital in the business. V

6 Now let s assume the owner decides to have the lights turned on and pays \$500 to the local electric company. After the expenditure, the books would look as follows: Cash \$8,500 Total \$8,500 Total \$00.00 Total \$8,500 Once again, notice how the owner equity goes down, or is reduced, to the extent of, or by, the expenditure. When an owner spends money, the net capital goes down, there is no other choice on the books. VI

8 Now let s examine Accrual Based accounting examples to see what happens to the books when we post an Account Receivable A/R) and also an Account Payable (A/P). Remember, in business, it is important to record the fact that a customer owes us money once we have completed our part of the bargain in a sales transaction. It is common that a customer may pay later for goods or services already delivered, but we want to keep track of the fact that the customer owes us the money. Also remember, in business, it is important to record the fact that we owe a vendor or supplier money once the vendor or supplier has completed its part of the bargain in a purchase transaction. It is common that a business owner may pay later for goods or services already received or delivered, but we want to keep track of the fact that we owe the vendor or supplier the money. So let s assume we make a \$100 sale on account we delivered the goods or services today, but expect to get paid later. We have completed our part of the bargain, fulfilled our duties in the contract, but will be paid at a future date. We want to record the sale today, because that s when it was made, but we did not get the cash today. So on the books, we record the sale today (one side of the transaction) and also record simultaneously an account receivable (the other side of the transaction) because the customer still owes us the money. Here s what the books would look like after the above: Cash \$12,500 Accounts Receivable \$100 Total \$12,600 Total \$00.00 Plus: Sales Revenue +\$4,100 Total \$12,600 VIII

9 Once again, notice how the increase in assets in the form of an account receivable is offset by an increase in the equity of the business due to a sale. Even though the money was not collected at the time the sale was made, we still record the sale (because the money was earned) and show the offset as an account receivable. Later when the customer pays, here s what the books would look like: Cash \$12,600 Accounts Receivable \$00.00 Total \$12,600 Total \$00.00 Plus: Sales Revenue +\$4,100 Total \$12,600 Especially notice here, when the \$100 is paid, we did NOT record the sale a second time. When the money was paid by the customer, a deposit was made into the checking account and the cash balance went up; and at the same time, the accounts receivable balance went down or was reduced to the extent of the payment. IX

10 To wrap up our examples of accrual based accounting, let s assume we have an account at Office Depot. When we buy office supplies there, we place the charge on our account and they bill us later. Further, let s assume we spend \$200 on office supplies one day, and we intend to pay for those supplies sometime in the near future, when the bill becomes due. Here s what the books would look like immediately after we bought the supplies and owed Office Depot \$200: Cash \$12,600 Accounts Receivable \$00.00 Total \$12,600 Accounts Payable \$200 Total \$ Plus: Sales Revenue +\$4,100 Office Supplies (\$200) Total \$12,400 Notice in this example how the liabilities went up (increased) to the extent of the account payable (one side of the transaction) while simultaneously the owner equity went down to the extent of the office supplies purchased (the other side of the transaction). In this case, the owner bought the office supplies even though payment was not made at the time of purchase. But, the owner owed the money at that point in time, so we want the books to show both facts: the business owed the money; and simultaneously, the business incurred an expense! X

11 To complete our example of owing the money for office supplies purchased at a prior date, let s assume we make payment to Office Depot once the bill comes due. Here s what the books would look like immediately after making payment: Cash \$12,400 Accounts Receivable \$00.00 Total \$12,400 Accounts Payable \$00.00 Total \$00.00 Plus: Sales Revenue +\$4,100 Office Supplies (\$200) Total \$12,400 Here, please notice that the cash balance decreased by the \$200 paid (one side of the transaction) and simultaneously the accounts payable balance also went down by \$200 (the other side of the transaction). Especially note that when the \$200 was paid, we did NOT record the payment as an expense at that time. The expense was recorded earlier when the account payable was initially put on the books! Congratulations! The above synopsis covers everything you need to know before coming to class. In fact, it hopefully summarizes everything you need to know about accounting and bookkeeping for a small business! I look forward to meeting you at the QuickBooks seminar and please try to bring a USB memory stick to class if you want to back up the practice data file we will create together. XI

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