VCE Accounting Unit 3. Video of this presentation can be found on my YouTube channel here https://www.youtube.com/channel/UCf5jyuJoYwie8tWfvjEc0zg.

1. 2.2
THE ACCOUNTING EQUATION
AND THE BALANCE SHEET

2. Video of this presentation at…
YouTube Channel for VCE Accounting

3. © Michael Allison. Author’s permission required for external use.
 The Accounting Equation in action…
1 January 2015
• Harry Hampson decided to set up his own small business called Harry’s Hats.
• He deposited $50,000 of his own money into a bank account in the name of Harry’s Hats.
• This is called a capital contribution – the money (capital) the owner uses to start the business off.
Assets Liabilities
Owner’s
Equity= +
Harry’s Hats: Balance Sheet as at 1 January 2015
Assets Liabilities
Cash 50,000
Owner’s Equity
Capital 50,000
Harry’s Hats: Balance Sheet as at 1 January 2015
Assets Liabilities
Cash 50,000
Owner’s Equity
Capital 50,000
$50,000
Harry’s Hats: Balance Sheet as at 1 January 2015
Assets Liabilities
Cash 50,000
Owner’s Equity
Capital 50,000
$50,000$0
Harry’s Hats: Balance Sheet as at 1 January 2015
Assets Liabilities
Cash 50,000
Owner’s Equity
Capital 50,000
TOTAL 50,000
Harry’s Hats: Balance Sheet as at 1 January 2015
Assets Liabilities
Cash 50,000
Owner’s Equity
Capital 50,000
TOTAL 50,000 TOTAL 50,000
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

4. © Michael Allison. Author’s permission required for external use.
 The Accounting Equation in action…
2 January 2015
• Harry spent $10,000 to buy inventory (stock) of hats
Assets Liabilities
Owner’s
Equity= +$50,000 $50,000$0
Harry’s Hats: Balance Sheet as at 2 January 2015
Assets Liabilities
Cash 50,000
Owner’s Equity
Capital 50,000
Harry’s Hats: Balance Sheet as at 2 January 2015
Assets Liabilities
Cash 50,000
Inventory 10,000 Owner’s Equity
Capital 50,000
Harry’s Hats: Balance Sheet as at 2 January 2015
Assets Liabilities
Cash 40,000
Inventory 10,000 Owner’s Equity
Capital 50,000
Harry’s Hats: Balance Sheet as at 2 January 2015
Assets Liabilities
Cash 40,000
Inventory 10,000 Owner’s Equity
Capital 50,000
TOTAL 50,000
Harry’s Hats: Balance Sheet as at 2 January 2015
Assets Liabilities
Cash 40,000
Inventory 10,000 Owner’s Equity
Capital 50,000
TOTAL 50,000 TOTAL 50,000
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

5. © Michael Allison. Author’s permission required for external use.
 The Accounting Equation in action…
3 January 2015
• Harry borrowed $20,000 from XYZ Bank and used the money to buy a new vehicle for the business
Assets Liabilities
Owner’s
Equity= +$70,000 $50,000$20,000
Harry’s Hats: Balance Sheet as at 3 January 2015
Assets Liabilities
Cash 40,000
Inventory 10,000 Owner’s Equity
Capital 50,000
Harry’s Hats: Balance Sheet as at 3 January 2015
Assets Liabilities
Cash 40,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 50,000
Harry’s Hats: Balance Sheet as at 3 January 2015
Assets Liabilities
Cash 40,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 50,000
Harry’s Hats: Balance Sheet as at 3 January 2015
Assets Liabilities
Cash 40,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 50,000
TOTAL 70,000
Harry’s Hats: Balance Sheet as at 3 January 2015
Assets Liabilities
Cash 40,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 50,000
TOTAL 70,000 TOTAL 70,000
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

6. © Michael Allison. Author’s permission required for external use.
 The Accounting Equation in action…
4 January 2015
• Harry withdrew $10,000 from the business for his personal use
• This is called drawings – when the owner withdraws their capital from the business
Assets Liabilities
Owner’s
Equity= +$60,000 $40,000$20,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 40,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 50,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 30,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 50,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 30,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 30,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
TOTAL 60,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 30,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
TOTAL 60,000 TOTAL 60,000
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

7. © Michael Allison. Author’s permission required for external use.
 The Accounting Equation in action…
4 January 2015
• The business repaid $5,000 of the loan owing to XYZ Bank
Assets Liabilities
Owner’s
Equity= +$55,000 $40,000$15,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 30,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 25,000 Loan – XYZ Bank 20,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 25,000 Loan – XYZ Bank 15,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 25,000 Loan – XYZ Bank 15,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
TOTAL 55,000
Harry’s Hats: Balance Sheet as at 4 January 2015
Assets Liabilities
Cash 25,000 Loan – XYZ Bank 15,000
Inventory 10,000 Owner’s Equity
Vehicle 20,000 Capital 40,000
TOTAL 55,000 TOTAL 55,000
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

8. © Michael Allison. Author’s permission required for external use.
 A Balance Sheet is NOT prepared after each and every transaction that occurs
Balance Sheet 1 Transaction Balance Sheet 2 Transaction Balance Sheet 3 Transaction
Balance Sheet 4 Transaction Balance Sheet 5 Transaction Balance Sheet 6 Transaction
Balance Sheet 7 Transaction Balance Sheet 8 Transaction Balance Sheet 9 Transaction
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

9. © Michael Allison. Author’s permission required for external use.
 Rather, the Balance Sheet is prepared “as at” a certain point of time – at the end of
what is called the “reporting period”
 A Balance Sheet is prepared at the start of the reporting period
 Transactions take place during the reporting period
 A Balance Sheet is prepared at the end of the reporting period to summarise
all the changes that have occurred
Reporting Period
Balance Sheet
“As at” the start
of the reporting
period
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Transaction
Balance Sheet
“As at” the end
of the reporting
period
2.2 THE ACCOUNTING EQUATION AND
THE BALANCE SHEET

10. © Michael Allison. Author’s permission required for external use.
TASK
In-class Homework
Ex2.11 X