The document discusses the basic accounting equation of Assets = Liabilities + Owner's Equity. It defines key accounting concepts such as assets, liabilities, owner's equity, and how transactions affect accounts. Assets are resources owned, liabilities are amounts owed, and owner's equity is the residual claim. The accounting equation is expanded to track increases and decreases in owner's equity from revenues, expenses, investments, and withdrawals. Transactions are analyzed to show their dual effects on at least two accounts.

1. ACCOUNTING EQUATION
AND ACCOUNT
CLASSIFICATION
05 June 2013

2. Basic Accounting Equation
A = L + C
ASSETS = LIABILITIES + OWNER’S EQUITY

3. Assets
 Assets are resources controlled by an entity.
 Two major classifications:
 Current assets – are cash and other resources
that are reasonably expected to be realised in
cash or sold or consumed in the business within 1
year of the reporting date or the business’s
operating cycle, whichever is longer.
 Non-current assets – long-term assets

4. Assets
 Current Assets
 Cash
 Short-term investments (i.e., government bonds)
 Receivables
 Notes receivable
 Accounts receivable
 Interest receivable
 Prepaid expenses

5. Assets
 Non-current Assets
 Investment property – investments of the
company in non-current assets other than
financial assets
 Property, plant and equipment – tangible
resources of a relatively permanent nature that
are used in the business and not intended for
sale.
 Intangible assets – non-current resources that do
not have physical substance
(i.e., patents, copyrights, trademarks)

6. Liabilities
 Liabilities are claims against assets.
 Two major classifications:
 Current liabilities - are liabilities expected to be
settled in the normal operating cycle of the
business or are due to be settled within 12
months after the end of the reporting period.
 Accounts Payable
 Salaries Payable
 Utilities Payable

7. Liabilities
 Two major classifications:
 Non-current liabilities – obligations expected to
be paid after 1 year or after an operating cycle
 Bonds payable
 Mortgages payable
 Long-term notes payable

8. Owner’s Equity
 The ownership claim on total assets.
 The content of the owner’s equity section
varies with the form of business entity.
Type of business Equity account
Sole-proprietorship One capital account
Partnership One capital account for each partner
Corporation
Share capital, Reserves, Retained earnings
(Shareholder's equity)

9. Increases in Owner’s Equity
 Investments by owner are the assets the
owner puts into the business.
 Income is the gross increase in owner’s equity
resulting from business activities entered into
for the purpose of earning profit.
 Revenue arises in the course of ordinary activities
of the business.
 Gain arises from events that are not part of a
businesses ordinary course of activities.

10. Decreases in Owner’s Equity
 Drawings are withdrawals by the owner of
cash or other assets for personal use.
 Expenses are the costs of assets consumed or
services used un the process of earning
income.
 Salaries expense
 Utilities expense
 Rent expense
 Depreciation expense
 Interest expense

11. Owner’s Equity
 Profit results when revenue exceeds
expenses.
 Loss occurs when expenses exceed revenue.

12. Basic Accounting Equation
A = L + C
ASSETS = LIABILITIES + OWNER’S EQUITY

13. Accounting Equation
 Basic Accounting Equation
ASSETS = LIABILITIES +
OWNER’S EQUITY
 Expanded Basis Accounting Equation
ASSETS = LIABILITIES + OWNER’S CAPITAL –
OWNER’S DRAWINGS + REVENUE –
EXPENSES

14.  A transaction is an exchange of values
(stated in terms of money) between two
parties.
 In every transaction there is value received
and value parted with. This is the dual effect
of a business transaction which gave rise to
double-entry bookkeeping.
Double-entry System
 Each transaction affects at least two accounts
(one debited, one credited)
Transaction Analysis

15.  Source of Assets – An asset account
increases and a corresponding claims
(liabilities or owner’s equity) account
increases.
 Examples:
 Investment of cash by the owner
 Purchase of supplies on account
Increase in Assets = Increase in Owner’s Equity
Increase in Assets = Increase in Liabilities
Types and Effects of
Transactions

16.  Exchange of Assets – One asset account
increases and another asset account
decreases.
 Examples:
 Equipment purchased on cash
 Collection of Accounts Receivable
Increase in One asset = Decrease in another Asset
Types and Effects of
Transactions

17.  Use of Assets – An asset account decreases
and a corresponding claims (liabilities or
equity) account decreases.
 Examples:
 Withdrawal of cash by the owner
 Payment of Accounts Payable
Decrease in Assets = Decrease in Owner’s Equity
Decrease in Assets = Decrease in Liabilities
Types and Effects of
Transactions

18.  Exchange of claims – One claims (liabilities
or owner’s equity) account increases and
another claims (liabilities or owner’s equity)
account decreases.
 Examples:
 Received bill for utilities but the owner did not pay
yet
Increase in Liabilities = Decrease in Owner’s Equity
Increase in Owner’s Equity = Decrease in liabilities
Increase in one Liability = Decrease in another Liability
Increase in one Owner’s Equity = Decrease in another Owner’s Equity
Types and Effects of
Transactions

19. Analyzing Business
Transactions
 Account – is an individual accounting record
of increases and decreases in a specific
asset, liability or owner’s equity item.
 Consists of three parts:
 The title of the account
 Left or debit side
 Right or credit side

20. Analyzing Business
Transactions
 T account – a simplified format of account that
resembles the letter T.
Left or debit side Right or credit side
Debit balance Credit balance
Title of account

21. Debits and Credits
 Debit
 Indicates left
 Abbreviated as Dr
 Came from the Latin word debere which originally
meant ‘debtor’
 Credit
 Indicates right
 Abbreviated as Cr
 Came from the Latin word credere which
originally meant ‘creditor’

22. Debits and Credits
ASSETS = LIABILITIES +
OWNER’S EQUITY
Left or debit side
ASSETS
Right or credit side
LIABILITIES AND OWNER'S EQUITY
(REVENUE - EXPENSE)
Debit balance Credit balance
Title of account