03.the accounting equation

2. Assets Liabilities Owner’s Equity
= +
• Provides the underlying framework for recording and
summarizing economic events.
• Assets are claimed by either creditors or owners.
• Claims of creditors must be paid before ownership
claims.

3. Assets Liabilities Owner’s Equity
= +
• Resources a business owns.
• Provide future services or benefits.
• Cash, Supplies, Equipment, etc.
• Current and Non Current Asset
Asset
s

4. Assets Liabilities Owner’s Equity
= +
• Are consisting of cash, good for resale or items
having short life
• Most liquid
• Cash, Inventory, Bank, Debtors etc
Current Assets

5. Assets Liabilities Owner’s Equity
= +
• Asset that have long life bought with the intention to
use them in the business not to resell
• Least liquid
• Motor Vehicle, Building, Furniture etc
Non Current Assets

6. Assets Liabilities Owner’s Equity
= +
• Claims against assets (debts and obligations).
• Creditors - party to whom money is owed.
• Accounts payable, Notes payable, etc.
Liabilities

7. Assets Liabilities Owner’s Equity
= +
• Amount that owing by the business that is expected to
be paid within one year
• Short Term Loan, Bank Overdraft, Creditors etc
Current Liabilities

8. Assets Liabilities Owner’s Equity
= +
• Amount that owing by the business that is not
expected to be paid within one year
• Long Term Loan, Debenture etc
Long Term Liabilities

9. Assets Liabilities Owner’s Equity
= +
• Ownership claim on total assets.
• Referred to as residual equity.
• Capital, Drawings, etc. (Proprietorship or
Partnership).
Owner’s Equity

10. Revenues result from business activities entered into for the purpose of
earning income.
Common sources of revenue are: sales, fees, services, commissions,
interest, dividends, royalties, and rent.

11. Expenses are the cost of assets consumed or services used in the
process of earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense,
tax expense, etc.

12. Transactions are a business’s economic events recorded by
accountants.
 May be external or internal.
 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting equation.

13. Are the following events recorded in the accounting records?
Event
Supplies are
purchased
on account.
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
An employee
is hired.
Owner
withdraws
cash for
personal use.
Record/ Don’t
Record

14. Practice Question
In February 2010, Paula King invested an additional
RM10,000 in her business, King’s Pharmacy, which is
organized as a proprietorship. King’s accountant, Lance
Jones, recorded this receipt as an increase in cash and
revenues. Is this treatment appropriate? Why or why not?

15. Answer
No, this treatment is not proper. While the transactions
does involve a receipt of cash, it does not represent
revenues. Revenues are the gross increase in owner’s
equity resulting from business activities entered into for
the purpose of earning income. This transactions is
simply an additional investment made by the owner in the
business.

16. Transaction (1). Investment By Owner. Ray Neal decides to
open a computer programming service which he names
Softbyte. On September 1, 2010, he invests RM15,000 cash in
the. The effect of this transaction on the basic equation is:

17. Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for RM7,000 cash.

18. Transaction (3). Purchase of Supplies on Credit. Softbyte
purchases for RM1,600 from Acme Supply Company computer
paper and other supplies expected to last several months.

19. Transaction (4). Services Provided for Cash. Softbyte
receives RM1,200 cash from customers for programming
services it has provided.

20. Transaction (5). Purchase of Advertising on Credit. Softbyte
receives a bill for RM250 from the Daily News for advertising but
postpones payment until a later date.

21. Transaction (6). Services Provided for Cash and Credit.
Softbyte provides RM3,500 of programming services for
customers. The company receives cash of RM1,500 from
customers, and it bills the balance of RM2,000 on account.

22. Transaction (7). Payment of Expenses. Softbyte pays the
following Expenses in cash for September: store rent RM600,
salaries of employees RM900, and utilities RM200.

23. Transaction (8). Payment of Accounts Payable. Softbyte pays
its RM250 Daily News bill in cash.

24. Transaction (9). Receipt of Cash on Account. Softbyte
receives RM600 in cash from customers who had been billed for
services [in Transaction (6)].

25. Transaction (10). Withdrawal of Cash by Owner. Ray Neal
withdraws RM1,300 in cash from the business for his personal
use.

26. Summary of Transactions

27. Companies prepare four financial statements from the summarized
accounting data:
Statement of
Financial
Position
Income
Statement
Statement of
Cash Flows
Owner’s Equity
Statement

28. Reports the revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Income Statement

29. Net income is needed to determine the
ending balance in owner’s equity.

30. Statement indicates the reasons why
owner’s equity has increased or
decreased during the period.
Owner’s Equity
Statement

31. The ending
balance in
owner’s equity is
needed in
preparing the
balance sheet

32. Statement of
Financial Position

34. Information for a specific period of time.
Answers the following:
1. Where did cash come from?
2. What was cash used for?
3. What was the change in the cash balance?
Statement of Cash Flows

36. Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful. Request
for further information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The
Publisher assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the information
contained herein.

37. Any
Questions?