Accounting Equation-An Introduction

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An introduction to the Accounting Equation and its components.

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Accounting Equation-An Introduction

  1. 1. The Accounting Equation An Introduction 1
  2. 2. All businesses have three parts to their financial makeup: • The things or property that the company owns. We call these things ASSETS. • The money that the company owes to other people. We call these obligations LIABILTIES. • The claim of the owner of the business to the Assets after the Liabilities are paid. We call this claim OWNER’S EQUITY (or just EQUITY). 2
  3. 3. These three parts ALWAYS have the same relationship to each other. We call this relationship the Accounting EquationAssets = Liabilities + Equity 3
  4. 4. The Accounting Equation could also apply to a personal situation. Suppose you buy a car for$5,000, borrow $4,000 from the bank, and pay the rest yourself. Here’s the result: Accounting EquationAssets = Liabilities + Equity $5,000 = $4,000 + $1,000 4
  5. 5. ASSETS are the RESOURCES OWNED BY A BUSINESS . Here are some types of assets that might be owned by a business company: Cash Notes Accounts Receivable ReceivableVehicles ASSETS Land Store Buildings Supplies Equipment 5
  6. 6. 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: Accounts Notes Payable Payable LIABILITIES Taxes Wages Payable Payable 6
  7. 7. EQUITY is the OWNER’S CLAIM ON ASSETS In a business EQUITY is composed of four parts that either increase or decrease equity: EQUITY CAPITAL: WITHDRAWALS: REVENUES: EXPENSES: What theowner puts − What the owner takes out of the + What the company − What the company into the business receives for pays to business sales operate the business.INCREASE DECREASE INCREASE DECREASE 7
  8. 8. Sometimes we expand the Accounting Equation to show all the Equity components. This is called theEXPANDED ACCOUNTING EQUATION. This equation must ALWAYS BE IN BALANCE 8

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