Lesson 1.1 The Accounting Equation and the Effects of Transactions on the Accounting Equation

An asset

is anything of value that is owned.

Claims on assets are

debt related to the assets of the business.

Liabilities

are debt or legal promises of repayment that the business has outstanding to individuals or other businesses.

Owner's equity

is the amount of assets that are left over for owners after paying all the liabilities of the business.

The accounting equation shows

the relationship among assets, liabilities, and owner's equity and is most often stated as: Assets = Liabilities − Owner's equity Assets (left-side amounts) must equal the claims on the assets (right-side amounts).

A transaction

is any business activity that changes assets, liabilities, or owner's equity.

An account is

a record that summarizes all the transactions pertaining to a single item in the accounting equation.

An account title

is the name given to an account.

An account balance

is the difference between the increases and decreases in an account.

A capital account

is an account used to summarize the owner's equity in a business.

Buying on account is

buying items and paying for them at a future date.

A creditor is

a person or business to whom a liability is owed.

What does buying on account mean?

Buying on account means buying items or services now and paying for them at a future date

How can a transaction affect only one side of the equation?

If one account is increased, another account on the same side of the equation must be decreased by the same amount.

What is a business activity?

A business activity occurs anytime a business spends money, receives money, or owes money.

What does the accounting equation show?

The accounting equation shows the relationship between assets, liabilities, and owner's equity.