Accounting equation
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*Assets
An asset is a resource controlled by the entity (as a result of past events) from which future economic benefits are expected. Or in other word, assets are ‘what the business owns’.
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ASSETS are the RESOURCES OWNED BY A BUSINESS .
Here are some types of assets that might be owned by a business company:
Land
Equipment
Buildings
Cash
Vehicles
Store Supplies
Notes Receivabl
e
Accounts Receivabl
e
ASSETS
*Land
*Computer
*Vehicle
*Cash
*examples
Decrease Assets Increase Assets
Purchasing Supplies (The asset account Cash decreases)
Purchasing Supplies (The asset account Supplies increases)
Owner Draws Owner Contributions
Repaying bank loans Receiving bank loans
Credit purchases
*Changes in assets
*Liabilities
Liabilities are present obligations of the entity (arising from past events), the settlement of which is expected to result in an outflow of economic benefits. Or in other word, liabilities are ‘what the business owes’.
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LIABILITIES are the CREDITOR’S CLAIMS ON ASSETS.
• Creditors are the people or companies to whom a business owes something (like money).
• Here are some types of liabilities that a company might owe:
Taxes Payable
Wages Payable
Notes Payable
Accounts Payable
LIABILITIES
*The most common liability is a loan.
*Another common liability is called creditors.
*A creditor, also known as a payable, is any business or person (apart from the bank) that you owe.
*Suppliers (who you owe for products purchased on credit) would fall under creditors.
*Examples
*The residual interest in the assets of the enterprise after deducting all its liabilities.
*What is owner’s equity
*Owner’s equity
Owner’s Equity is defined as the residual interest in the assets of the entity after the deduction of its liabilities.
*The owner’s equity is simply the owner’s share of the assets of a business.
*In other words…
*Represents the value of the assets that the owner can lay claim to.
*The value of all the assets after deducting the value of assets needed to pay liabilities.
*It is the value of the assets that the owner really owns.
OWNER’S EQUITY = ASSETS - LIABILITIES
*Owner’s equity
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EQUITY is the OWNER’S CLAIM ON ASSETSIn a business EQUITY is composed of four
parts that either increase or decrease equity:
CAPITAL:What the
owner puts into the business
−WITHDRAWALS
:What the
owner takes out of the business
+REVENUES:What the company receives for sales
−EXPENSES:What the company pays to
operate the business.
INCREASE DECREASE INCREASE DECREASE
EQUITY
*In the case of a corporation, which is publicly owned, equity is labeled shareholder’s equity
*Shareholder’s equity
Decrease Owner’s Equity Increase Owner’s Equity
Expenses Revenues
Losses Gains
Owner withdraws Owner investments
Beginning Capital
*Changes in owner’s equity
*Income
*Example: a service company earns revenue when it provides services to its clients
*Recorded as an increases in owner’s equity and an increase in assets
*Revenues
*The costs the company incurs in carrying on operations in its effort to create revenue
*Decrease owner’s equity
*Can be paid for with cash (decreases assets)
*Or charged (increase liabilities)
*Expenses
*The difference between expenses and equipment is equipment can be liquidated or converted to cash.
EXAMPLE:
*A company car is equipment: No affect on owner’s equity.
*A telephone bill is an expense Decreases owner’s equity.
*Expenses vs. equipment
*Net Income: The company is bringing in more money than it is spending to continue operations.
*Revenues > Expenses
*Net Loss: The company is bringing in less money than it is spending to continue operations
*Revenues < Expenses
*Break Even: When a company’s revenues are equal to their expenses
*Net income vs. net loss
*Owner’s equity
Beginning CapitalPLUS
Additional Investment
Net Income*
Revenues -- Expenses
Withdraws+--
If expenses are greater than revenues, then a net loss would result. This loss
would be subtracted from capital because it would be a negative number.
*Equation
The word equation comes from the word equal.
It is a state of being essentially equal or equivalent; equally balanced.
For any equation, one side always equals another.
*Accounting equation
Assets = Liabilities + Owner’s Equity
ASSETS = EQUITY + LIABILITIES
*The accounting equation indicates how much of the assets of a business belong to, or are owned, by whom.
*Assets can only ‘belong’ to two types of people:
*people outside the business who are owed money (liabilities)
*the owner himself (owner’s equity).
*The accounting equation
*The accounting equation should remain in balance at all times because of double-entry accounting or bookkeeping.
*Double-entry means that every transaction will affect at least two accounts in the general ledger.
*Double entry
*An owner's investment into the company will increase the company's assets and will also increase owner's equity.
*When the company borrows money from its bank, the company's assets increase and the company's liabilities increase.
*Examples of double entry
1. The basic accounting equation is assets = liabilities + ______________ ______________.
*The Accounting Equation worksheet
For each of the transactions in items 2 through 9, indicate the two (or more) effects on the accounting equation of the business or company.
#2
*Identifying changes in the
accounting equation
The owner invests personal cash in the business.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#3
*Identifying changes in the accounting
equationThe owner withdraws business assets for personal use.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#4
*Identifying changes in the accounting
equation
The company receives cash from a bank loan.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#5*Identifying
changes in the accounting
equationThe company repays the bank that had lent money to the company.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#6
*Identifying changes in the accounting
equationThe company purchases equipment with its cash.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#7
*Identifying changes in the accounting
equationThe owner contributes her personal truck to the business
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#8
*Identifying changes in the accounting
equationThe company purchases a significant amount of equipment on credit.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
#9
*Identifying changes in the accounting
equationThe company purchases land by paying half in cash and signing a note payable for the other half.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or Stockholders') Equity:
Increase Decrease No Effect
Every transaction has two sides
SALE
BANK ACCOUNT
CASH
ASSETS INCOME
CREDITACCOUNT RECEIVABLE
Every transaction has two sides
PURCHASE
BANK ACCOUNT
CASH
ASSETS LIABILITY
CREDIT
ACCOUNT PAYABLE
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REFERENCES
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