The Accounting Equation Assets = Liabilities + Owners Equity(the Accounting equation must always balance!!!)
Assets• An Asset is a resource controlled by the entity from which economic benefits are expected
Liabilities• Liabilities are present obligations of the entity, the settlement of which is expected to result in an outflow of economic benefit
Owners Equity• Owners equity is defined as the residual interest in the assets of the entity after the deduction of its liabilities. In effect is what is left over for the owner once a firm has meet all its liabilities, or the owner’s claim on the firm’s assets.
The Balance Sheets• The balance sheet is a statement of what a business owns (assets) and owes (liabilities) at a specific point in time. It lists the assets that the business owns, the liabilities owed by the business, and the value of the owners equity (or net worth of the business). The balance sheet is also known as a statement of financial position because it shows a summary of the business’s financial position at a particular point in time.
The Balance Sheet• A balance sheet, also known as a "statement of financial position", reveals a companys assets, liabilities and owners equity (net worth). The balance sheet, together with the cash flow statement, make up the cornerstone of any companys financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyse it and how to read it.
Classification on the Balance Sheet • Current Assets • Non-Current Assets • Current Liabilities • Non-Current Liabilities
Current Assets• In accounting, a current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short- term investments, accounts receivable, inventory.
Non- Current Assets• non-current asset or as property, plant, and equipment (PP&E), is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.
Current Liabilities• A companys debts or obligations that are due within 12 Months. Current liabilities appear on the companys balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.
Non Current Liabilities• Non-current liabilities are those obligations that will not become due and payable in the coming year. There are three types of non- current liabilities, only two of which are listed on the balance sheet: Non-current Portion of Long Term Debt (LTD), Subordinated Officer Loans (Sub-Off).
Transactions & Accounting Equation1. Every Transaction will affect two items on the balance sheet ( either Asset, Liability or Oe)2. After recording the changes, the Accounting equation must still balance.FOR EXAMPLEBill purchases stock on credit for $ 400Stock (Assets) will go up $400 & Creditor (Liability) down $ 400
Transactions1. Ralph Contributes $2000 to start the company2. Billy buys $ 400 worth of stock3. Tim buys a van for $ 25000 on credit4. Shane sells $ 800 worth of stock on credit5. Adnan takes out a $ 3000 loan
Historical Cost & Balance Sheet• When preparing a balance sheet, assets are recorded a their original purchase price (historical cost). Under the historical cost principle, adjustment to inflate the cost of an asset is wrong and is kept on the books at the price brought until the asset is sold.